Sultan Qaboos University Mechanical and Industrial Eng. Department MEIE4285 – Engineering Economics
Semester Project
AGK Fitness Centre
Submitted By: Abdulwahab Al Maimani – 96912 Ghassan Al Hajri – 99064 Khalid Boulbrachene – 98852 th
Due Date: 26 May 2014 Submitted to: Dr. Khalid Al Zebdah. MEIE4285/10
Abstract Group of four investors were interested in opening a fitness centre with the name AGK. The major alternatives were either to construct the fitness centre in a new developing area, or renting the facility in two different locations; one of 200m 2 of size and the other of 400m 2 in size. Expecting members from 300-400 due to high demand in the current market. An economical analysis was conducted to the three major alternatives, resulting in excluding alternative 1, which is to build the facility due to poor results in the equivalent worth and the IRR methods. As the analysis were left to alternative 2 and 3, the incremental analysis was conducted to seek for the most feasible alternative, and resulted in having alternative 2 as the most feasible alternative, as it justified the increment. Sensitivity analysis was then conducted to alternative 2, to make uncertainty explicit. The analysis showed that annual revenues and expenses are the most sensitive factors to changes, so careful management to expenses and revenues should be applied. Future improvements in profitability were suggested to conduct a marketing strategy to boost the sales resulting in higher profit.
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Table of Contents Abstract """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" # Introduction """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" """""""""""""""""""""""""""""""" $ Assumptions"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" $ Minor Alternatives """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" """"""""""""""""""""""""""""""""""""""""""" $ Major Alternatives """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" """"""""""""""""""""""""""""""""""""""""""" $
Alternative #1: """""""""""""""""""""""""""""""""""""""""" """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" """""""""""""""""""" $ Alternative #2: """""""""""""""""""""""""""""""""""""""""" """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" """""""""""""""""""" % Alternative #3: """""""""""""""""""""""""""""""""""""""""" """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" """""""""""""""""""" & Sensitivity Analysis """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" """"""""""""""""""""""""""""""""""""""""""""""""""""""" & Conclusion """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""" """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" """"""""" ' Future Improvements """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" """""""" ' Appendix A """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" (
Table of Figures Cash Flow Diagram for Alternative 1 """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" % Cash Flow Diagram for Alternative 2 """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" % Cash Flow Diagram for Alternative 3 """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" & Sensitivity Graph for Alternative 2 """"""""""""""""""""""""""""""""""""""""""""""""""" """"""""""""""""""""""""""""""""""""""""""" )
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Introduction The idea of fitness centre is successful, because of its wide target market. It has the potential to attract people of health issues such as high cholesterol or diabetes who need health professionals to become healthier, or people who are overweight and want to have a fit and healthier body, or even athletes, bodybuilders or anybody trying to reach their physical peak.
A group of four investors are interested in developing feasible fitness centre in newly developing areas in Muscat. The distance which people travel to go to a fitness centre may be a reason why some of them change their minds. Assumptions The aim of the project is to establish small or medium sized fitness centre. The options are to build a new facility, or rent a facility. The minimum attractive rate of return (MARR) is set to be 20%. The MARR was set so the enterprise can start making profit after 3 years. The lifetime of the project is 10 years, which is the study period to evaluate the project. Expecting 300-400 members. Minor Alternatives 2 2 Project size may vary from small (200m ) to medium (400m ). The location will be Amerat, Khodh Block 6, or the wave muscat. The time for completion will be around 3 to 12 months. The options as stated above, to buy a land and build the facility, or rent a facility. The equipments will be purchased; the suppliers will be from UK, or USA. The financing, the four investors have budget of total OMR 120,000, but if the investment requires more capital, a loan from the bank will be taken. The price of the annual memberships in the fitness centre will be depending on the location. Major Alternatives Alternative #1: 2 At Al Amerat, buy the land of medium size (400m ), and build the facility, buy lower quality equipment from ProForm, UK. It will take 12 months to complete. The membership price is OMR 90 per year. Expecting 300 members. Table 1: Economical Analysis for Alterative 1. OMR Capital Investment
101,625
Land Building
45,000 40,000
Equipments + Shipping
16,625
Annual Expenses
15640
Electricity + Water Maintenance Salaries
800 440 14,400
Annual Revenue
27,000
Salvage Value
49,000
PW
(OMR 45,971.69)
AW
(OMR 10,965.29)
FW
(OMR 284,644.59)
IRR%
8%
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Alternative #2: 2 At Al Khodh Block 6, renting a medium sized facility (400m ), buying equipments from Horizon Fitness, USA, it will take 3 months to complete renovation and install equipments. The membership price will be OMR 90 per year. Expecting about 350 members per year. Table 2: Economical Analysis for Alternative 2. OMR Capital Investment
20,600
Renovation
3,000
Equipments + Shipping Annual Expenses
17,600 25,240
Rent Electricity + Water
9,600 800
Maintenance Salaries Annual Revenue
440 14,400 31,500
Salvage Value
0
PW
OMR 5,644.875
AW
OMR 1,346.431
FW
OMR 34,951.580
IRR%
28%
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Alternative #3: 2 At the wave muscat, renting a small sized facility (200m ), buying equipments from Sole Fitness, USA. It will take 3 months to install the equipments. The membership will be OMR 110 per year. Expecting 250 members. Table 3: Economical Analysis for Alternative 3. OMR Capital Investment
14,700
Renovation Equipments + Shipping
1,500 13,200
Annual Expenses
23,710
Rent Electricity + Water Maintenance Salaries
14,400 550 360 8,400
Annual Revenue
27,500
Salvage Value
0
PW
OMR 1,189.47
AW
OMR 283.72
FW
OMR 7,364.88
IRR%
22%
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Sensitivity Analysis After economically analysing the three alternatives, alternative 1 can be excluded because it is not feasible, by equivalent worth and by Internal rate of return methods; it showed negative results and an IRR% < the MARR stated above. Using incremental analysis alternative 2 justified the incremented cost, which makes alternative 2 the most feasible investment for the investors. Table 4 shows the incremental analysis for the alternatives.
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Table 4: Incremental Analysis for the Alternatives. Alternative 1
Alternative 2
Alternative 3
101,625
20,600
14,700
Annual Expenses
15640
25,240
23,710
Annual Revenue
27,000
31,500
27,500
Salvage Value
49,700
0
0
8%
28%
22%
Capital Investment
IRR%
Ordered Alternatives Alternative 1
Alternative 2
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-14700
-20600
-5,900
Annual Expenses
23710
25240
1,530
Annual Revenue
27500
31500
4,000
0
0
0
22%
28%
40%
Capital Investment
Salvage Value IRR%
As alternative 2 is the most feasible alternative, therefor, sensitivity analysis is to be conducted for alternative 2, the analysis will illustrate which factors are the most sensitive to changes with time. The tested factors are: capital investment, annual revenues, annual expenses, and the MARR. Figure 4 shows the spider plot illustrating the sensitivity analysis.
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From the graph above, the most sensitive factors are the annual revenues and the annual expenses, as they both draw the steepest graphs. Which means, for small altering in the annual revenues or expenses, the present worth (PW) at certain i%, which is MARR, will significantly affected. But capital investment and the MARR were not showing significant altering in the present worth; this concludes that MARR and C.I are not much sensitive to changes.
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Conclusion The results above shows that alternative 1 is not feasible, as building the facility will be costing a lot, and the net cash flows are not very high to recover the investment. But the equivalent worth and IRR of both alternative 2 and 3 showed feasibility. The increment analysis was carried out to choose the most feasible, the order of least investment was alternative 3 then alternative 2, by that order, and alternative 2 was the subject of justifying the increments. The results showed that alternative 2 had justified the increment, making it the most feasible alternative for the investors.
Sensitivity analysis was conducted for alternative 2 as it was the most feasible solution, the analysis showed that the most sensitive factors are the annual revenues and the expenses; they both showed significant altering in the present by small deviation.
Future Improvements To improve profitability, investors recommended marketing strategies to increase number of members joining the fitness centre. Introducing new services for members or opening new branch if feasible.
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Appendix A Excel Sheets Copy
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