P21-38 (similar to) Question Help Merganser Laundromat is trying to enhance the
ID: 2578033 • Letter: P
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P21-38 (similar to) Question Help Merganser 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. Merganser estimates the cost of the new equipment at $164,000. The equipment has a useful life of 9 years. Merganser expects cash fixed costs of $79,000 per year to operate the new machines, as well as cash variable costs in the amount of 5% of revenues. Merganser evaluates investments using a cost of capital of 8%. (Click the icon to view the Future Value of $1 factors.) Click the icon to view the Future Value of Annuity of $1 factors. (Click the icon to view the Present Value of $1 factors.) Click the icon to view the Present Value of Annuity of $1 factors. Read the reguirements Requirement 1. Calculate the payback period and the discounted payback period for this investment, assuming Merganser expects to generate $160,000 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. Calculate the payback period and the discounted payback period for this investment, assuming Merganser expects to generate $160,000 in incremental revenues every year from the new machines Assume instead that Merganser expects an uneven stream of incremental cash revenues from installing the new washing machines. Based on this estimated revenue stream, what are the payback and discounted payback periods for the investment? 2. Year 2 4 8 Projected Revenue $80,000 $ 125,000 $ 120,000 $130,000 $155,000 $160,000 $120,000 $155,000 $180,000 Print DoneExplanation / Answer
Answer 1 Calculation of Payback period Cash outflow at Year 0 = $164000 Net Cash Inflow per year from Year 1 to 9 = Incremental revenue - Cash variable costs - Cash Fixed costs Net Cash Inflow per year from Year 1 to 9 = $160000 - (5%*$160000) - $79000 = $73,000 Payback period = Cash Outflow at Year 0 / Net Cash inflow per year = $164000 / $73000 = 2.25 years The payback period for the investment assuming uniform net cash inflow is 2.25 years. Calculation of Discounted Payback period Year Cash flow Discount Factor @ 8% Present Values Cumulative Present Values 0 -$164,000 1.00000 -$164,000 -$164,000 1 $73,000 0.92593 $67,593 -$96,407 2 $73,000 0.85734 $62,586 -$33,822 3 $73,000 0.79383 $57,950 $24,128 4 $73,000 0.73503 $53,657 $77,785 5 $73,000 0.68058 $49,683 $127,468 6 $73,000 0.63017 $46,002 $173,470 7 $73,000 0.58349 $42,595 $216,065 8 $73,000 0.54027 $39,440 $255,505 9 $73,000 0.50025 $36,518 $292,023 Discounted payback period = 2 years + ($33822 / $57950) = 2.58 years Answer 2 Calculation of Payback period Year Cash flow Cumulative Cash flow 0 -$164,000 -$164,000 1 $80,000 -$84,000 2 $125,000 $41,000 3 $120,000 $161,000 4 $130,000 $291,000 5 $155,000 $446,000 6 $160,000 $606,000 7 $120,000 $726,000 8 $155,000 $881,000 9 $180,000 $1,061,000 Payback period = 1 year + ($84000/$125000) = 1.67 years Calculation of Discounted Payback period Year Cash flow Discount Factor @ 8% Present Values Cumulative Present Values 0 -$164,000 1.00000 -$164,000 -$164,000 1 $80,000 0.92593 $74,074 -$89,926 2 $125,000 0.85734 $107,167 $17,241 3 $120,000 0.79383 $95,260 $112,501 4 $130,000 0.73503 $95,554 $208,055 5 $155,000 0.68058 $105,490 $313,546 6 $160,000 0.63017 $100,827 $414,373 7 $120,000 0.58349 $70,019 $484,392 8 $155,000 0.54027 $83,742 $568,133 9 $180,000 0.50025 $90,045 $658,178 Discounted payback period = 1 year + ($89926 / $107167) = 1.84 years
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