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)