Reference no: EM133060501

You have been observing the increased health awareness of Australians for some time and, in view of this, have decided to establish and run a ?tness centre. You estimate that initial cash out?ows will include: $50,000 to renovate the gym premises; $45,000 for new equipment; and, $5,000 to install the equipment. You have done a market survey which leads you to believe that you will get 500 members each paying $1,000 in membership fees per year. You have also found 5 gym instructors you can hire at a cost of $30,000 per year. You also estimate additional costs of running the gym to be $200,000 per year. For tax reasons, you have decided to expense the renovation costs and depreciate the equipment over ?ve years using the straight-line method (NB. Given the nature of the gym equipment, you don't think it will be worth anything at the end of this time so have decided to calculate depreciation using a salvage value of zero). However, you expect the equipment will be fully functional for 10 years and are actually assessing the viability of setting up the gym for a 10 year period. Assuming that the initial investment is made today, all cash ?ows are received or paid at the end of the year, the tax rate is 40% and your six-month required rate of retum is 6%, should you invest in the project? Why?