FACT SET John Peterson is considering investing in a new gym franchise business. John has hired you to estimate the financial viability of the...
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I need help with the last question "Provide an analysis of three major risks that John would face in making this

investment"


So i have found that John's investment is financially viable because his NPV is great than one as well as the profitability index


I just wanted to know what are some good major risks i can talk about in regards to Johns investment



 






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FACT SET John Peterson is considering investing in a new gym franchise business. John has hired you to estimate the
financial viability of the business. To do this, you intend to conduct a Net Present Value (NPV) analysis with
the following set of available data. TASKS I The membership fees are set at a flat rate of $70 per month. You estimate that the gym will
have approximately 250 members in the first year, 300 in the second year and 500 in the third
yean I Under the franchise agreement, John will have to pay a royalty payment equal to 7% of sales.
He will also have to contribute 4% of sales towards the marketing costs of the franchisor. I Monthly rental estimate is $3500. Utility estimate is $1,500 per month.
I John needs to employ a full-time manager and two (2) casuals to look after the gym during the
week. No staff are needed during the weekends. The manager’s wage is estimated to be $50,000 per annum plus 9.5% Superannuation. The total hours for two (2) caSuals are
approximately 25 hours per week at a rate of $25 per hour plus 9.5% superannuation. I The gym equipment costs $120,000 and is expected to depreciate over a six-year useful life on
a straight-line basis. Besides the cost of the equipment, John also incurs other initial
investments such as initial franchise fee, grand opening, etc. which totals to $200,000. I John finances the franchise using his own savings. You estimate the cost of capital to be 16%. I Assume John incurs a tax rate of 30% and assume no inflation in prices or wages. What is the contribution margin per member per year? (6 mark) Contribution margin per member per year = Selling price for 12 months for each member —Variable
costs for 12 months for each member. Calculate the yearly fixed costs that John will incur. (10 marks) Calculate the break-even number of gym members per year. (4 marks) Calculate the Net Profit each year for the first three years of operation. (15 marks) Estimate the free cash flow the franchise generates each year for the first three years of operation.
(15 marks) Free Cash Flow = Net Profit + Depreciation x (1-tax rate) + Interest x (1-tax rate). Assume John can sell the franchise for approximately $600,000 at the end of the third year.
Calculate the Net Present Value (NPV) of the business. (15 marks) Calculate the Profitability Index. (5 mark) Would you recommend to John that the investment is financially viable? Justify your
recommendation. (15 marks) Provide an analysis of three major risks that John would face In making this Investment. (15 marks)

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