You have decided to cash in on the dancing craze in your town, so you are thinking aboutsetting up a dance studio. You can rent a warehouse close to the business district for $40000 p.a. In order to attract the 'right' sort of clientele, you will need to spend $120 000 onredecorating and installing mirrors on all surfaces. You will also purchase some equipmentat a cost of $70 000. You expect that the equipment can be sold at the end of four years for$7 000.
Your market research suggests you can attract and maintain 600 students. Each would payan annual tuition fee of $900. Instructors are usually paid a salary of $43 000 p.a. and youwould employ 5 of these to keep the studio operating 7 days a week. You will operate thebusiness for 4 years before retiring. If your cost of capital is 14%, should you set up thebusiness? Calculate IRR and NPV to support your decision.