P21-33 (similar to) ?Question Help Fulmar Laundromat is trying to enhance the se

Question

P21-33 (similar to) ?Question Help Fulmar Laundromat is trying to enhance the services it provides to customers, mostly college students It is looking into the purchase ot new high efficiency washing machines that w allow for the laundry's status to be checked via smartphone Fulmar estimates the cost of the new equipment at $178,000. The equipment has a usetui life of 9 years Fuirmar expects foed costs of $80 000 per year to operate the new machines, as well as cash variable costs in the amount of 15% of revenues Fu nar evaluates investments using a st of capital o, 6% Read the reurement Requirement 1.Calculate the payback period and the discounted payback period for ths investment assuming Fulmar expects to generate $190.000 In Iincremanta evnvery year s the new machines (Round your anser to two decimal places The payback period for the investment assuming uniform net cash inflows isyears

Explanation / Answer

1) Annual incremental cash flows: Annual incremental revenues 190000 Variable costs (15%) 28500 Fixed costs 80000 Incremental annual cash flow 81500 Payback period = Initial investment/Annual cash flow = 178000/81500 = 2.18 Years Discounted payback: Year Cash flow PVIF at 6% PV at 6% Cumulative PV 0 -178000 1.00000 -178000 -178000 1 81500 0.94340 76887 -101113 2 81500 0.89000 76888 -24226 3 81500 0.83962 68429 44203 4 81500 0.79209 64556 108759 5 81500 0.74726 60902 169661 6 81500 0.70496 57454 227115 7 81500 0.66506 54202 281317 8 81500 0.62741 51134 332451 9 81500 0.59190 48240 380691 Discounted payback period = 2+24226/68429 = 2.35 Years 2) Payback period: Year Cash flow Cumulative Cash flow 0 -178000 -178000 1 85000 -93000 2 130000 37000 3 140000 177000 4 170000 347000 5 180000 527000 6 170000 697000 7 140000 837000 8 150000 987000 9 185000 1172000 Payback period = 1+93000/130000 = 1.72 Years Discounted payback: Year Cash flow PVIF at 6% PV at 6% Cumulative PV 0 -178000 1.00000 -178000 -178000 1 85000 0.94340 80189 -97811 2 130000 0.89000 80190 -17622 3 140000 0.83962 117547 99925 4 170000 0.79209 134656 234581 5 180000 0.74726 134506 369087 6 170000 0.70496 119843 488931 7 140000 0.66506 93108 582039 8 150000 0.62741 94112 676150 9 185000 0.59190 109501 785652 Discounted payback period = 2+17622/117547 = 2.15 Years

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