John and Lea Smith both worked for a small-town school district for 30 years. When John and Lea retired, they moved to the town of Jacksonville, NC. When the Smiths moved to the town, they decided to start a child care business in their home called Home Away from Home. Home Away from Home is licensed by the state. The state charges an annual fee of $225 to maintain the license. Insurance is $3,840 annually. The facility is only permitted to care for a maximum of six children. The Smiths charge a fee of $800 per month for each child. The monthly fee is based on a full day of care, from 8:00 a.m. to 4:00 p.m., Monday thru Friday. If additional time is required beyond 4:00 p.m., parents must pay an additional charge of $15 per hour for each child. The couple provides two meals and a snack for the children. The cost of the meals and snack is $3.20 per child per day. There are six children currently enrolled. The daycare space is an 820 square foot addition to their home. The Smiths completed the $79,500 renovations immediately after purchasing the home. They believe the addition has a useful life of 25 years. The facility has a large open space for play, reading, and other activities. There is a section for sleeping which contains small cots. The facility is equipped with a small kitchen, two bathrooms and a small laundry area. The daycare increased the Smiths utility cost by $50 each month. During the first week of operations, the washer and dryer stopped working. Both appliances were old and had been used by the couple for many years. The old appliances cost a total of $440. While a laundry room was not initially a necessity, it became increasingly important for laundering the soiled clothes of the children, blankets, and sheets. A company nearby, Red Oak Laundry and Dry Cleaning, can launder clothing for the Smiths, including pick-up and delivery, for $52 per month. Alternatively, the Smiths can take clothes to the laundromat once a week, which is three miles away (one way). The applicable mileage rate is $0.56/mile. They can use the laundromats machines for a cost of $8 per week. The self-service alternative does not include detergent or fabric sheets. The couple would need to purchase these items in order to use the laundromat. Purchasing laundry supplies in bulk from MegaloMart would cost $35 every quarter. The final alternative is for the Smiths to purchase a washer and dryer. The cost of the appliances is: washer $420 and dryer $380. The additional accessories for both appliances, needed for installation, cost $43.72. The store will deliver the appliances at a total cost of $35. The cost of installing the appliances is free. Both appliances are expected to last 8 years. According to the manufacturer the washer will increase energy costs by $120 per year. The dryer will increase energy costs by $145 per year. The Smiths need some assistance in evaluating and deciding which laundry alternative is best. They have contacted you, to provide some advice.

4. The couple has already made a significant initial investment in this business. Calculate the payback method to express how long will it take for the couple to recoup their initial investment, if they also choose to purchase the appliances. Is the payback method a good measure of whether the company will be successful? If not, how would you measure the success of the company? Explain.