Frank White will retire in six 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:
PLEASE JUST ANSWER A-D (AT THE BOTTOM): THE ANNUAL RATE OF RETURN, PAYBACK PERIOD COMPUTATION, C NET PRESENT VALUE CHART & INTERNAL RATE OF RETURN.
Frank White will retire in six 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: A) Washers, dryers, and other equipment needed to open the laundromat would cost $194,000. 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 six years, the working capital would be released for investment elsewhere. B) The laundromat would charge $1.50 per use for the washers and $0.75 per use for the dryers. Mr. White expects the laundromat to gross $1,800 each week from the washers and $1,125 each week from the dryers. C) The only variable costs in the laundromat would be 72 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 $3,000 per month for rent, $1,500 per month for cleaning, and $1,875 per month for maintenance, insurance, and other items. E) The equipment would have a 10% disposal value in six years. a. Calculate the annual rate of return using the following formula: Annual rate of return - Cashreceipts - Depreciation Investment Would the car wash be purchased using the 12% required rate of return? b. Calculate the payback period using the following formula: Payback period - Investment Cashreceipes Frank White hopes to recover his initial investment within three years. Would he accept this investment using this criterion? Compute the net present value using the required rate of return of 12% and set your problem up using in Excel using the following template and use the NPV formula below! - Time O (Now) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Explanation Equipment cost Working capital needed Net annual cash inflows Salvage value of equip. Working capital released Cash inflows/loutflows) In a different cell address than the table presented above, use the following formula in Excel to calculate Net Present Value: =Cash flow yr. O. NPV(Required Rate of Return, cash flow yr. 1: cash flow yr.6) d. Approximate the internal rate of return using the following formula: In a different cell address than the table presented above, use the following formula in Excel to calculate Internal Rate of Return: = IRR(cash flow yr. O: cash flow yr. 6)
