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Laundromat is trying to enhance the services it provides to? customers, mostly c

ID: 2407242 • Letter: L

Question

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.

FulmarFulmar

estimates the cost of the new equipment at

$178,000.

The equipment has a useful life of 9 years.

FulmarFulmar

expects cash fixed costs of

$80,000

per year to operate the new? machines, as well as cash variable costs in the amount of

15%

of revenues.

FulmarFulmar

evaluates investments using a cost of capital of

6?%.

Requirement 1. Calculate the payback period and the discounted payback period for this? investment, assuming

FulmarFulmar

expects to generate

$ 190 comma 000$190,000

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.

FulmarFulmar

$ 190 comma 000$190,000

2.

FulmarFulmar

                                                                                              

Year

1

2

3

4

5

6

7

8

9

Projected Revenue

$85,000

$130,000

$140,000

$170,000

$180,000

$170,000

$140,000

$150,000

$185,000

The payback period for the investment assuming uniform net cash inflows is

years.

Explanation / Answer

Cost of Equipment = 178,000

Life: 9 years

Fixed Cash Cost per year = 80,000

Variable Cost = 15% of Revenues

Cost of Capital = 6%

Requirement 1:

Payback period when revenue per year = 190,000

Net Cash Flow per year:

Revenue = 190,000

Less: Variable Cost 28500

Less: Fixed Cost 80,000

Incremental Cash Flows per year = 81500

Payback period = Initial Investment/Annual Cash Inflow

=178,000/81500 = 2.184 Years

Discounted payback period: Discounted Cash inflows are considered under discounted payback period method

Year

Cash Flow

PVF@6%

PV of Cash Flows

Cumulative Cash Flows

1

81500

0.943

76855

76855

2

81500

0.890

72535

149390

3

81500

0.840

68460

217850

4

81500

0.792

64548

282398

5

81500

6

81500

7

81500

Initial Investment of 178,000 will be recovered between year 2 and 3

Payback period = 2 + (217850-178000)/(217850-149390)

=2+0.582 = 2.582 years

2. Uneven Cash Flows:

Year

Revenue

Variable cost

Fixed Cost

CF

Cum. Cash Flows

1

85000

12750

80,000

-7750

-7750

2

130,000

19500

80,000

30500

22750

3

140000

21000

80,000

39000

61750

4

170,000

25500

80,000

64500

126250

5

180000

27000

80,000

73000

199250

6

170,000

25500

80,000

64500

263750

7

140,000

21000

80,000

39000

302750

8

150,000

22500

80,000

47500

350250

9

185000

27750

80,000

77250

427500

Initial Investment of 178,000 will be recovered between year 4 and 5

Payback period = 4 + (199250-178000)/(199250-126250)

=4+0.291 = 4.291 years

On the basis of Discounted Cash Flows:

Year

Cash Flows

PV@6%

PV Cash Flows

Cum. Cash Flows

1

-7750

0.943

-7308

-7308

2

30500

0.890

27145

19837

3

39000

0.840

32760

52597

4

64500

0.792

51084

103681

5

73000

0.747

54531

158212

6

64500

0.705

45473

203685

7

39000

0.665

25935

8

47500

0.627

29783

9

77250

0.592

45732

Discounted Payback period = 5 + 0.565

=5.565 years

Year

Cash Flow

PVF@6%

PV of Cash Flows

Cumulative Cash Flows

1

81500

0.943

76855

76855

2

81500

0.890

72535

149390

3

81500

0.840

68460

217850

4

81500

0.792

64548

282398

5

81500

6

81500

7

81500