Reference no: EM132462758
Problem - Running a tennis club, with a dozen tennis courts. Last year, have 500 members, each of whom paid $1000 in annual dues, and generated operating income of $100,000. Now, considering offering tennis lessons to members and have collected the following information:
You have ten years left on lease and not able to renew the lease.
Spend $200,000 in new equipment today(capital expenditures) and depreciate over the next ten years to a salvage value of zero.
Pay tennis pro salary of $50,000 each year for the next ten years.
Expect to generate $200,000 from tennis lessons each year, and will get to keep 60% of these revenues; the tennis pro gets the remaining 40%.
The cost of capital of sports facilities is 9% and the marginal tax rate is 40%. There are no working capital requirements.
Required - How to calculate the NPV of adding tennis lessons? How do i know which one should include in the cash flow?
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