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Net Present Value Analysis

Rob plans to retire in 6 years and want to open some type of small business operation that can be managed within his free time away from his regular occupation.
He's thinking about opening a Laundromat, he has determined the following:
1. Washers, dryers, and other equipment needed to open cost $194,000
2. 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 6yrs, the working capital would be released for investment elsewhere.
3. A charge for $1.50 per use for the washers and $0.75 per use for the dryers.
4. Rob expects the Laundromat to gross $1,800 each week from the washer and $1,125 each week from the dryers.
5. The only variable cost in the Laundromat would be 7 ½ cents per use for water and electricity the washers and 9 cents per use for the gas and electricity for the dryers.
6. Fixed cost would be $3,000 per month for rent, $1,500 per month for cleaning, and $1,875 per month for maintenance iurance, and other items.
7. The equipment would have a 10% disposal value in 6 years. Rob will not open the laundromat unless it provides at least a 12% return

Assume that the Laundromat would be open for 52 weeks a yr, compute the expected net annual cash receipts from its operations (gross cash receipts less cash disbursements). (Do not include the cost of the equipment, working capital, or salvage values)

Would you advise Rob to open the Laundromat? Show computations using the net present value method of investment analysis) round to nearest whole dollar and ignore income taxes)

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Solution Summary

The solution explains how to carry out a NPV analysis and make a decision about setting up of a laundromat