Writing Assignment In this project we will apply what we learned about capital budgeting using real-world examples. Gen
Posted: Tue Nov 23, 2021 8:49 am
Writing Assignment
In this project we will apply what we learned about capital
budgeting using real-world examples.
General Instructions:
• This is an individual project, i.e., each one of you will have to
submit the project. You may
discuss and work together with your classmates, but the write-up
has to be on an individual
basis. This means you have to write it in your own words. I will
dock points (20% of the
grade) for identically written papers from all parties
involved.
• Deadlines:
o First submission: November 29
o Final submission: December 17
Part 1. The Problem
Background:
Suppose you are a health fitness consultant. Your clients come to
you for advice ranging from diet
and nutrition to exercise. One of your clients is Dustin Winthrop.
He is relatively healthy but has
an underlying health condition that puts him in the vulnerable
category for COVID-19. He is
worried about going to the gym to workout. He wants you to help him
evaluate two options:
Option A: Go back to the gym. He is currently paying $130 per month
(taxes included) for a gym
membership. He assumes that this price will likely remain the same
for the next 10 years. If he
goes back to the gym, he will make sure to observe social
distancing, wear gloves and a face mask,
and make sure each equipment that he uses is wiped down and
sanitized.
Option B: Purchase Tonal. A home gym that costs $2,995. He also has
to purchase equipment
worth $495 and pay for installation (assume this is $350) and taxes
(assume the sales tax is 9.5%
and will be applied to the total cost). He also has to pay a $49
per month (taxes included)
membership fee. He assumes this monthly membership fee will likely
remain the same for the next
10 years.
Dustin plans to stay on his workout regimen for the next six to
eight years. His opportunity cost,
i.e., discount rate is between 3.5% - 5.25%.
Your job is to make a recommendation about which option will be
more cost effective.
Questions that must be addressed in the write-up:
1. For each capital budgeting decision criterion below, write a
justification for that
criterion’s suitability for this analysis. That is, use this step
to figure out which of the
following capital budgeting decision criteria you will use to make
the recommendation.
(2-10 sentences per criterion)
a. NPV
b. IRR
c. MIRR
d. EAC. Note: in the textbook, we calculated the Equivalent Annual
Cost. For this
problem you should think of this as an Equivalent Monthly
Cost.
e. Payback period
2. For each method that you deem appropriate, calculate the outcome
for each of the
following scenarios: (attach a separate sheet showing your
solutions for each scenario)
a. If Dustin keeps working out for the next six years and the
discount rate is 3.5%.
b. If Dustin keeps working out for the next six years and the
discount rate is 5.25%.
c. If Dustin keeps working out for the next ten years and the
discount rate is 3.5%.
d. If Dustin keeps working out for the next ten years and the
discount rate is 5.25%.
3. Based on your results from step 2, make a recommendation for
Dustin if
a. he keeps working out for the next six years (2-10
sentences)
b. he keeps working out for the next ten years (2-10 sentences)
In this project we will apply what we learned about capital
budgeting using real-world examples.
General Instructions:
• This is an individual project, i.e., each one of you will have to
submit the project. You may
discuss and work together with your classmates, but the write-up
has to be on an individual
basis. This means you have to write it in your own words. I will
dock points (20% of the
grade) for identically written papers from all parties
involved.
• Deadlines:
o First submission: November 29
o Final submission: December 17
Part 1. The Problem
Background:
Suppose you are a health fitness consultant. Your clients come to
you for advice ranging from diet
and nutrition to exercise. One of your clients is Dustin Winthrop.
He is relatively healthy but has
an underlying health condition that puts him in the vulnerable
category for COVID-19. He is
worried about going to the gym to workout. He wants you to help him
evaluate two options:
Option A: Go back to the gym. He is currently paying $130 per month
(taxes included) for a gym
membership. He assumes that this price will likely remain the same
for the next 10 years. If he
goes back to the gym, he will make sure to observe social
distancing, wear gloves and a face mask,
and make sure each equipment that he uses is wiped down and
sanitized.
Option B: Purchase Tonal. A home gym that costs $2,995. He also has
to purchase equipment
worth $495 and pay for installation (assume this is $350) and taxes
(assume the sales tax is 9.5%
and will be applied to the total cost). He also has to pay a $49
per month (taxes included)
membership fee. He assumes this monthly membership fee will likely
remain the same for the next
10 years.
Dustin plans to stay on his workout regimen for the next six to
eight years. His opportunity cost,
i.e., discount rate is between 3.5% - 5.25%.
Your job is to make a recommendation about which option will be
more cost effective.
Questions that must be addressed in the write-up:
1. For each capital budgeting decision criterion below, write a
justification for that
criterion’s suitability for this analysis. That is, use this step
to figure out which of the
following capital budgeting decision criteria you will use to make
the recommendation.
(2-10 sentences per criterion)
a. NPV
b. IRR
c. MIRR
d. EAC. Note: in the textbook, we calculated the Equivalent Annual
Cost. For this
problem you should think of this as an Equivalent Monthly
Cost.
e. Payback period
2. For each method that you deem appropriate, calculate the outcome
for each of the
following scenarios: (attach a separate sheet showing your
solutions for each scenario)
a. If Dustin keeps working out for the next six years and the
discount rate is 3.5%.
b. If Dustin keeps working out for the next six years and the
discount rate is 5.25%.
c. If Dustin keeps working out for the next ten years and the
discount rate is 3.5%.
d. If Dustin keeps working out for the next ten years and the
discount rate is 5.25%.
3. Based on your results from step 2, make a recommendation for
Dustin if
a. he keeps working out for the next six years (2-10
sentences)
b. he keeps working out for the next ten years (2-10 sentences)