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 $155,000. In addition, $8,000 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.
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| b. |
The laundromat would charge $1.55 per use for the washers and $0.80 per use for the dryers. Mr. Grayson expects the laundromat to gross $3,565 each week from the washers and $2,080 each week from the dryers.
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| 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.
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| d. |
Fixed costs would be $5,600 per month for rent, $2,900 per month for cleaning, and $2,015 per month for maintenance, insurance, and other items.
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| e. |
The equipment would have a 11% disposal value in three years.
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Mr. Grayson will not open the laundromat unless it provides at least a 13% return. (Ignore income taxes.)
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Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.
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| 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.)
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| Annual net cash receipts |
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| 2a. |
Determine the net present value of this investment alternative. (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.)
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| 2b. |
Would you advise Mr. Grayson to open the laundromat? |
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