Management: Case Study

Jinny Buffett recently retired as a flight attendant and is interested in opening a fitness center and health spa
exclusively for women in Grand Cayman, where she resides. After careful study, she is somewhat puzzled as
to how to proceed. In her words, “I see my business going in one of two directions: Either I open the fitness
center and health spa all at once, or I start with the health spa and hold off on the fitness center for a while.
Either way, it should be a success because women on this island love to be pampered. My only concern about
the fitness center is the initial cost, but if the projections look good enough, I know some investors in Phoenix
who can help me get started. In any event, I plan to retire permanently in 10 years.” Table 6-4 (Links to an
external site.) and Table 6-5 (Links to an external site.). (Use appropriate factor(s) from the tables provided.
Round the PV factors to 4 decimals.)
The following information is available:
Jinny has identified a suitable location for her business in a new shopping center in George Town, capital of the
Cayman Islands. The developer has units of 1,000 square feet and 2,500 square feet available and is willing to
sell either unit for CI$150 per square foot (CI$1.00 = US$1.25). Alternatively, the space can be leased at a cost
of CI$1.80 per square foot per month, on an annual basis.
Commercial real estate values have more than doubled in Grand Cayman during the past 10 years, with no
slowdown in sight. As a result, Jinny is more attracted to the purchase option because she expects the price
per square foot to be CI$300 by the time she is ready to sell her unit in 10 years.
Exercise machines and other equipment necessary to open the fitness center would cost US$50,000. In
addition, US$35,000 would need to be invested in equipment related to the health spa. The useful life for all
such equipment is 10 years, and the expected salvage value is not large enough to be concerned about.
In addition, US$8,000 would need to be invested in an inventory of cosmetics and skin care products
necessary to operate the health spa. This level of inventory would need to be maintained throughout the 10-
year period and will be given away to loyal customers when Jinny retires permanently.
The health spa can be operated in the 1,000-square-foot unit. Variable operating costs would include CI$0.10
per square foot per month for cleaning and CI$0.40 per square foot per month for utilities. The 2,500-squarefoot unit is large enough to operate both the fitness center and health spa, and the CI$0.10 rate per square foot
for cleaning would not change. However, if the 2,500-square-foot unit were used, the health spa would be
located in an open loft that would need to be air-conditioned at all times. As a result, utility costs are expected
to be CI$0.60 per square foot per month under this option.
Jinny is a certified aesthetician and expects to do most of the makeovers, facials, and peels herself, but she
needs a qualified assistant for the health spa. She estimates that hiring an appropriate person will cost
US$25,000 per year. Likewise, for the fitness center, two full-time aerobics instructors would be hired for
US$20,000 each per year, and a physical trainer would be hired for US$30,000 per year.
Additional fixed costs include US$3,000 per year for advertising and US$4,500 per year for maintenance,
insurance, and other items. These costs will be incurred without respect to the size of operations.
Annual membership fees to the fitness center will be CI$300, and a preliminary market survey shows a
demand of approximately 500 initial members. Although members tend to come and go, the net change in
membership from year to year is not expected to be significant. No additional fees will be charged to fitness
center members.
Health spa fees are assessed on a user basis, although the steam room facilities are available at no charge to
fitness center members. The net cash inflow from cosmetics and skin care products (after deducting the cost of
inventory used and sold) is expected to be CI$8,000 per month.
Jinny’s cost of capital is 12%, and there are no taxes in the Cayman Islands.

Sample Solution