You have been observing the progressive gentrification of San Francisco with interest. You realize that the time is ripe for you to start and run an aerobic exercise center. You find an abandoned warehouse in Fisherman's Wharf which will meet your needs and rents for $48000/ year. You estimate that it will initially cost $50000 to renovate the place and buy Nautilius equipment for the center. (There will be no salvage and the entire initial cost is depreciable) You have done a market survey which leads you to believe that you will get 500 members each paying $500/year. You have also found 5 instructors you can hire for $24000/year apiece. Your tax rate if you start making profits will be 40% and you choose to use straight line depreciation on your initial investment. If your discount rate is 15% and you expect to retire to the Bahamas in ten years, answer the following questions:
(a) Is this a good investment?
(b) How sensitive is your conclusion to your assumptions about the number of members you expect to have? (i.e. How much margin for error do you have on this estimate?)