Question

Your neighborhood self-service laundry is for sale and you consider investing in this business. For the business alone and no other assets (such as building and land), the purchase price is $240,000. The net cash flows for the project are $30,000 per year for the next 5 years. You plan to borrow the money for this investment at 5%. Prepare a net present value calculation for this project. What is the net present value of this project? Calculate the simple payback period for this project. Your desired payback period is 5 years. How long is the payback period for this project? Is this a good investment? What would be a good price at which to purchase this business? Submit an Excel spreadsheet which must include the answers to all 3 questions: 1) A Net Present Value calculation, 2) a Simple Payback Period calculation, and 3) the answer to question regarding whether this is a good investment and what the best price should be.

Answer 1

1]

NPV is calculated using NPV function in Excel.

NPV is -$110,116

2]

Payback period is the time taken for the cumulative cash flows to equal zero.

Payback period is longer than 5 years.

Exact payback period = initial investment / annual cash inflow\

Exact payback period = $240,000 / $30,000 = 8 years

3]

This is not a good investment because the NPV is negative, and the payback period is longer than 5 years.

At the required return of 5%, there is no good price to purchase this business because the NPV is negative.

A 0$ 1 $ 2 $ 3 $ 4 $ 5 $ $ B C Cumulative Cash flow (240,000) $ (240,000) 30,000 $ (210,000) 30,000 $ (180,000) 30,000 $ (150,000) 30,000 $ (120,000) 30,000 $ (90,000) (110,116) 8 NPV

A 1 Year 20 31 42 5 3 6 4 7 8 NPV Cash flow - 240000 30000 30000 30000 30000 30000 =NPV(5%,B3:B7)+B2 Cumulative Cash flow =B2 =C2+B3 =C3+B4 =C4+B5 =C5+B6 =C6+B7