Frank White will retire in three years He wants to open some

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 $2,065 per month for maintenance, insurance, and other items. The equipment would have a 12% disposal value in three years. Mr. White will not open the laundromat unless it provides at least a 13% return. (Ignore income taxes.) Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables. Required: 1. Assuming that the laundromat would be open 52 weeks a year, compute the expected annual net cash receipts from its operation (gross cash receipts less cash disbursements). (Do not include the cost of the equipment, the working capital, or the salvage values in these computations.) (Do not round intermediate calculations. Omit the \"$\" sign in your response.) Annual net cash receipts $ 2a. 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.) Would you advise Mr. White to open the laundromat?

Solution

1

Calculation of Annual Net Cash receipts :

Gross Revenue from Washers = 2800 Uses *$1.35*52 weeks =

$                196,560

Gross Revenue from Dryers   = 3100 Uses *$0.60*52 weeks =

$                   96,720

Less: Variable costs :

Water and electricity for Washers = 2800 uses *7.25 cents /100

$                      (203)

Gas and electricity for Washers = 3100 uses *9 cents /100

$                      (279)

Less: Fixed Costs:

Rent = 4900*12 =

$                (58,800)

Cleaning = 3400*12 =

$                (40,800)

Maintenance, Insurance and other = 2065 *12 =

$                (24,780)

Annual Net Cash receipts

$                168,418

2

Calculation of Net present value:

Year

Cash Flows (CF)

PVF (13%)

PV = CF*PVF

Cost of Equipment

0

$              (176,000)

1

$       (176,000)

Working Capital investment

0

$                   (5,000)

1

$            (5,000)

Working Capital release

3

$                     5,000

0.693

$              3,465

Annual Net Cash receipts

1 to 3

$                168,418

         2.361

$          397,635

Disposal value = (176000*12%)

3

$                   21,120

0.693

$            14,636

Net present value

$          234,736

3

Yes

The NPV of the proposal in positive , so we shall advice Mr. White to open the Laundromat.

1	Calculation of Annual Net Cash receipts :
	Gross Revenue from Washers = 2800 Uses *$1.35*52 weeks =		$                196,560
	Gross Revenue from Dryers   = 3100 Uses *$0.60*52 weeks =		$                   96,720
	Less: Variable costs :
	Water and electricity for Washers = 2800 uses *7.25 cents /100		$                      (203)
	Gas and electricity for Washers = 3100 uses *9 cents /100		$                      (279)
	Less: Fixed Costs:
	Rent = 4900*12 =		$                (58,800)
	Cleaning = 3400*12 =		$                (40,800)
	Maintenance, Insurance and other = 2065 *12 =		$                (24,780)
	Annual Net Cash receipts		$                168,418
2	Calculation of Net present value:
		Year	Cash Flows (CF)	PVF (13%)	PV = CF*PVF
	Cost of Equipment	0	$              (176,000)	1	$       (176,000)
	Working Capital investment	0	$                   (5,000)	1	$            (5,000)
	Working Capital release	3	$                     5,000	0.693	$              3,465
	Annual Net Cash receipts	1 to 3	$                168,418	2.361	$          397,635
	Disposal value = (176000*12%)	3	$                   21,120	0.693	$            14,636
	Net present value				$          234,736
3	Yes
	The NPV of the proposal in positive , so we shall advice Mr. White to open the Laundromat.