Laundromat is trying to enhance the services it provides to? customers, mostly c
ID: 2407242 • Letter: L
Question
Laundromat is trying to enhance the services it provides to? customers, mostly college students. It is looking into the purchase of new? high-efficiency washing machines that will allow for the? laundry's status to be checked via smartphone.
FulmarFulmar
estimates the cost of the new equipment at
$178,000.
The equipment has a useful life of 9 years.
FulmarFulmar
expects cash fixed costs of
$80,000
per year to operate the new? machines, as well as cash variable costs in the amount of
15%
of revenues.
FulmarFulmar
evaluates investments using a cost of capital of
6?%.
Requirement 1. Calculate the payback period and the discounted payback period for this? investment, assuming
FulmarFulmar
expects to generate
$ 190 comma 000$190,000
in incremental revenues every year from the new machines.? (Round your answer to two decimal? places.)
The payback period for the investment assuming uniform net cash inflows is
years.
Requirements:
1.
FulmarFulmar
$ 190 comma 000$190,000
2.
FulmarFulmar
Year
1
2
3
4
5
6
7
8
9
Projected Revenue
$85,000
$130,000
$140,000
$170,000
$180,000
$170,000
$140,000
$150,000
$185,000
The payback period for the investment assuming uniform net cash inflows is
years.
Explanation / Answer
Cost of Equipment = 178,000
Life: 9 years
Fixed Cash Cost per year = 80,000
Variable Cost = 15% of Revenues
Cost of Capital = 6%
Requirement 1:
Payback period when revenue per year = 190,000
Net Cash Flow per year:
Revenue = 190,000
Less: Variable Cost 28500
Less: Fixed Cost 80,000
Incremental Cash Flows per year = 81500
Payback period = Initial Investment/Annual Cash Inflow
=178,000/81500 = 2.184 Years
Discounted payback period: Discounted Cash inflows are considered under discounted payback period method
Year
Cash Flow
PVF@6%
PV of Cash Flows
Cumulative Cash Flows
1
81500
0.943
76855
76855
2
81500
0.890
72535
149390
3
81500
0.840
68460
217850
4
81500
0.792
64548
282398
5
81500
6
81500
7
81500
Initial Investment of 178,000 will be recovered between year 2 and 3
Payback period = 2 + (217850-178000)/(217850-149390)
=2+0.582 = 2.582 years
2. Uneven Cash Flows:
Year
Revenue
Variable cost
Fixed Cost
CF
Cum. Cash Flows
1
85000
12750
80,000
-7750
-7750
2
130,000
19500
80,000
30500
22750
3
140000
21000
80,000
39000
61750
4
170,000
25500
80,000
64500
126250
5
180000
27000
80,000
73000
199250
6
170,000
25500
80,000
64500
263750
7
140,000
21000
80,000
39000
302750
8
150,000
22500
80,000
47500
350250
9
185000
27750
80,000
77250
427500
Initial Investment of 178,000 will be recovered between year 4 and 5
Payback period = 4 + (199250-178000)/(199250-126250)
=4+0.291 = 4.291 years
On the basis of Discounted Cash Flows:
Year
Cash Flows
PV@6%
PV Cash Flows
Cum. Cash Flows
1
-7750
0.943
-7308
-7308
2
30500
0.890
27145
19837
3
39000
0.840
32760
52597
4
64500
0.792
51084
103681
5
73000
0.747
54531
158212
6
64500
0.705
45473
203685
7
39000
0.665
25935
8
47500
0.627
29783
9
77250
0.592
45732
Discounted Payback period = 5 + 0.565
=5.565 years
Year
Cash Flow
PVF@6%
PV of Cash Flows
Cumulative Cash Flows
1
81500
0.943
76855
76855
2
81500
0.890
72535
149390
3
81500
0.840
68460
217850
4
81500
0.792
64548
282398
5
81500
6
81500
7
81500
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