You have been observing the progressive gentrification of San Francisc

QUESTION

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 Fishermans Wharf which will meet your needs and rents for $48000/ year. You estimate that
We start by listing yearly income against yearly expenses: income per year: membership fees: 250,000 expenses per year: rent: 48,000 wages: 120,000 depreciation: 50,000 /10years = 5,000 Total: 173,000 Annual profits: 250,000-173,000=77,000 Profit after tax: 77,000*0.6=46,200 Now that we know the annual profit we can calculate the net present value of the investment. We keep in mind that initial expenses are 50,000 and our personal discount rate is 15%. NPV=-50,000 46,200 46,200/1.15 46,200/1.15^2 46,200/1.15^3 46,200/1.15^4 46,200/1.15^5

15^6 46,200/1.15^7 46,200/1.15^8 46,200/1.15^9 = 216,647.177 The net present value of the investment is $216,647.18. From a pure profit perspective this sounds like a good investment. Keeping in mind, however, that we want to retire to the Bahamas a sum of 216,000 does not sound large enough to live life to the fullest. So, in that sense, it is not a good investment.

ANSWER:

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