George Grayson will retire in five years. He wants to open some type of small bu

Question

George Grayson will retire in five 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. Grayson has determined the following:

Washers, dryers, and other equipment needed to open the laundromat would cost $185,000. 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 five years, the working capital would be released for investment elsewhere.

The laundromat would charge $1.40 per use for the washers and $0.65 per use for the dryers. Mr. Grayson expects the laundromat to gross $2,800 each week from the washers and $1,495 each week from the dryers.

The only variable costs in the laundromat would be 7½ 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 $4,100 per month for rent, $2,600 per month for cleaning, and $1,985 per month for maintenance, insurance, and other items.

The equipment would have a 9% disposal value in five years.

Click here to view Exhibit 11B-1 and Exhibit 11B-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.)

Determine the net present value of this investment alternative. (Use the appropriate table to determine the discount factor(s) and round final answers to the nearest dollar amount.)

George Grayson will retire in five 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. Grayson has determined the following:

Explanation / Answer

PART A- NET CASH INFLOWS a Operating period in no. of weeks 52 b Weekly gross receipts from washers 2800 c Weekly gross receipts from dryers 1495 d Charges per use, for washers 1.4 e Charges per use, for dryers 0.65 f Number of uses for washers(b/d) 2000 g Number of uses for dryers (c/e) 2300 1 Annual receipts from washers 145600 2800*52 2 Annual receipts from dryers 77740 1495*52 TOTAL CASH RECEIPTS (1+2) 223340 3 water and electricity charges for washer 7800 2000*52*.075 4 Gas and electricity for dryer 10764 2300*52*.09 5 Rent 49200 4100*12 6 Cleaning 31200 2600*12 7 Maintenance, insurance etc 23820 1985*12 TOTAL DISBUSEMENTS (3+4+5+6+7) 122784 NET ANNUAL CASH RECEIPTS 100556 PART B - NET PRESENT VALUE Initital cost, reduced by 9% being the disposable value after 5 years 168350 Cash accruals in five years 502780 Discount Rate, being the expected return 14% NPV 176867 Recommended for Investment YES Reason: The NPV of $ 176867 aganst present investnemt of $ 168350 at discount rate of 14%. Hence, recommendation is in positive

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