George Grayson will retire in four years. He wants to open some type of small bu
ID: 2587074 • 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. Calculation of Net Annual Cash receipts = Gross Cash Receipts - Cash Disbursements
Gross Cash Receipts = (3,300 + 1,875) x 52 = $269,100
Calculation of Cash Disbursements
Particulars
Amount
Variable Cost:
Water & Electricity (0.075 x 3,300 / 1.5 x 52)
8,580
Gas & Electricity (0.09 x 1875 / 0.75 x 52)
11,700
Fixed Cost:
Rent (4,300 x 12)
51,600
Cleaning (2,800 x 12)
33,600
Maintenance (2005 x 12)
24,060
Total Cash Disbursements
129,540
Net Cash Receipts = $269,100 - 129,540 = 139,560
2 a. Calculation of Net Present Value
Particulars
Amount (In $)
(A)
Time(n)
Present Value Factor (1/ (1.17)n), i=17%
(B)
Present Value Amount (In $)
(A x B)
Cash Outflows:
Equipment
163,000
0
1
163,000
Working Capital
7,000
0
1
7,000
TOTAL CASH OUTFLOWS
170,000
Cash Inflows:
Net Cash Receipts
139,560
1-4
2.743
382,813
Release of working capital
7,000
4
.534
3,738
Equipment Salvage value
13040
4
.534
6,964
Total Present Value of Cash Inflows
393,515
Net Present Value
223,515
2 b. Since the Net present value is higher, Mr. Grayson should open laundromat.
Particulars
Amount
Variable Cost:
Water & Electricity (0.075 x 3,300 / 1.5 x 52)
8,580
Gas & Electricity (0.09 x 1875 / 0.75 x 52)
11,700
Fixed Cost:
Rent (4,300 x 12)
51,600
Cleaning (2,800 x 12)
33,600
Maintenance (2005 x 12)
24,060
Total Cash Disbursements
129,540
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