Determine the net present value of investment alternative

Assignment Help Financial Management

Reference no: EM132044791

George Grayson 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. Grayson has determined the following:

a. Washers, dryers, and other equipment needed to open the laundromat would cost $151,000. In addition, $6,000 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.

b. The laundromat would charge $1.45 per use for the washers and $0.70 per use for the dryers. Mr. Grayson expects the laundromat to gross $3,045 each week from the washers and $1,680 each week from the dryers.

c. 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.

d. Fixed costs would be $4,200 per month for rent, $2,700 per month for cleaning, and $1,995 per month for maintenance, insurance, and other items.

e. The equipment would have a 9% disposal value in three years.

Mr. Grayson will not open the laundromat unless it provides at least a 13% return. (Ignore income taxes.)

Click here to view Exhibit 11B-1 and Exhibit 11B-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.)

2a. 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.)

2b. Would you advise Mr. Grayson to open the laundromat?

Yes

Reference no: EM132044791

Questions Cloud

Calculate the depreciation expense recorded on the equipment : Calculate the depreciation expense recorded on the equipment for 2024 assuming ABC Company uses the straight line depreciation method

What will be your total profit on these option positions : What will be your total profit on these option positions if the stock price is $24.60 on the day the options expire?

List the services you believe the family needs : List the services you believe this family needs and identify which model would best represent each of the services on your list.

What is the current value of your call option per share : If you assume the option finishes in the money, what is the current value of your call option per share?

Determine the net present value of investment alternative : Determine the net present value of this investment alternative. Would you advise Mr. Grayson to open the laundromat?

Most appropriate methods to achieve desired goals : Which organizational tool might provide a leader or manager the best guidance in selecting the most appropriate methods to achieve desired goals.

Calculate the net cash flow from financing activities : Calculate the net cash flow from financing activities for 2020. If your answer is negative, place a minus sign in front of your answer

Type of organizational structure : What type of organizational structure does this most closely resemble?

What is the current per share value of your option : The risk-free rate of return is 5 percent. What is the current per share value of your option if it expires in one year?

User Account

All Pages