George Grayson will retire in four years. He wants to open some type of small bu
ID: 2585923 • Letter: G
Question
George Grayson will retire in four 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 $163,000. In addition, $7,000 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 four years, the working capital would be released for investment elsewhere.
The laundromat would charge $1.50 per use for the washers and $0.75 per use for the dryers. Mr. Grayson expects the laundromat to gross $3,300 each week from the washers and $1,875 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 $4,300 per month for rent, $2,800 per month for cleaning, and $2,005 per month for maintenance, insurance, and other items.
The equipment would have a 8% disposal value in four 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 four 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
1-
cost of equipment
163000
investment in working capital
7000
total capital investment
170000
2-
gross revenue from washers
3300
per use revenue
1.5
total no of use in a week
3300/1.5
2200
gross from dryers
1875
per use reveneue
0.75
total no of use in a week
1875/.75
2500
revenue from washers
3300*52
171600
revenue from dryers
1875*52
97500
total revenue
269100
less variable cost
20280
washers
2200*.075*52
8580
dryers
2500*.09*52
11700
contribution margin
248820
less fixed cost
115200
rent
4300*12
51600
cleaning
2800*12
33600
maintenance
2500*12
30000
operating profit
133620
expected annual net cash flow
133620
year
expected annual net cash flow
present value of cash flow = cash flow/(1+r)^n r= 17%
0
-170000
-170000
1
133620
114205.1282
2
133620
97611.22069
3
133620
97611.22069
4
153660
82000.66641
net present value
sum of present value of cash flow
221428.236
cash flow in year 4
133620+7000+13040
153660
yes we would recommond to open the laundromat
1-
cost of equipment
163000
investment in working capital
7000
total capital investment
170000
2-
gross revenue from washers
3300
per use revenue
1.5
total no of use in a week
3300/1.5
2200
gross from dryers
1875
per use reveneue
0.75
total no of use in a week
1875/.75
2500
revenue from washers
3300*52
171600
revenue from dryers
1875*52
97500
total revenue
269100
less variable cost
20280
washers
2200*.075*52
8580
dryers
2500*.09*52
11700
contribution margin
248820
less fixed cost
115200
rent
4300*12
51600
cleaning
2800*12
33600
maintenance
2500*12
30000
operating profit
133620
expected annual net cash flow
133620
year
expected annual net cash flow
present value of cash flow = cash flow/(1+r)^n r= 17%
0
-170000
-170000
1
133620
114205.1282
2
133620
97611.22069
3
133620
97611.22069
4
153660
82000.66641
net present value
sum of present value of cash flow
221428.236
cash flow in year 4
133620+7000+13040
153660
yes we would recommond to open the laundromat
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