Frank White will retire in three years. He wants to open some type of small busi

Question

Frank White will retire in three years. He wants to open some type of small business operation that can be managed in the free time he has available from his regular occupation, but that can be closed easily when he retires. He is considering several investment alternatives, one of which is to open a laundromat. After careful study, Mr. White has determined the following: Washers, dryers, and other equipment needed to open the laundromat would cost $176,000. In addition, $5,000 in working capital would be required to purchase an inventory of soap, bleaches, and related items and to provide change for change machines. (The soap, bleaches, and related items would be sold to customers at cost.) After three years, the working capital would be released for investment elsewhere. The laundromat would charge $1.35 per use for the washers and $0.60 per use for the dryers. Mr. White expects the laundromat to gross $3,780 each week from the washers and $1,860 each week from the dryers. The only variable costs in the laundromat would be TA cents per use for water and electricity for the washers and 9 cents per use for gas and electricity for the dryers. Fixed costs would be $4,900 per month for rent, $3,400 per month for cleaning, and $2,065 per month for maintenance, insurance, and other items. The equipment would have a 12% disposal value in three years. Mr. White will not open the laundromat unless it provides at least a 13% return. (Ignore income taxes.) Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables. Assuming that the laundromat would be open 52 weeks a year, compute the expected annual net cash receipts from its operation (gross cash receipts less cash disbursements). (Do not include the cost of the equipment, the working capital, or the salvage values in these computations.) (Do not round intermediate calculations. Omit the "$" sign in your response.) Annual net cash receipts Determine the net present value using the net present value method of investment analysis. (Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the "$" sign in your response.) Net present value Would you advise Mr. White to open the laundromat?

Explanation / Answer

Initial cost          176,000 working capital              5,000 total          181,000 charge washers                 1.35 dryers                 0.60 washers dryers revenue 1.35 0.6 Variable cost 0.075 0.09 contribution margin 1.275 0.51 revenue per month washers(3780*4)            15,120 dryers(1860*4)              7,440 total revenue            22,560 Less: Variable cost per month Washers .075*15120/1.35                  840 Washers .09*7440/.6              1,116 total variable cost              1,956 contributions            20,604 Fixed cost Rent              4,900 Cleaning              3,400 Maintenance              2,065 Total fixed cost            10,365 Monthly cash receipt            10,239 Annual cash receipt    122,868.00 (10239*12) intial cost          181,000 Annual cash recaipts          122,868 Pv of annuity factor 3 years 13%            2.3612 present value of regular flow          290,116 disposal of asset 13%      21,120.00 (176000*12%) Pv of interest factor            0.6931 present value of sale            14,638 Total cash inflow          304,754 Total cash outflow          181,000 NPV          123,754 Since the NPV is positive Mr.white should open the laundromat

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