Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Your neighborhood laundromat is for sale and a friend is considering investing in this business. Your friend has asked for your financial advice regarding this endeavor.
For the business alone and no other assets (such as the building and land), the purchase price is $250,000. The net cash flows for the project are $30,000 per year for the next 5 years. The plan is to borrow the money for this investment at 6%.
You will need to submit a presentation sharing your recommendation and you must address the following questions:
Part A: Calculate the
- 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?
Use the following template to complete the Unit 4 Excel spreadsheet (IP): Unit 4 IP Assignment Template
Part B: Evaluate the investment and provide calculations for an alternative deal:
- How would you evaluate this investment? What would be a good price at which to purchase this business?
Part C: In a 15-slide presentation, show your calculations and recommendations on whether to purchase the laundromat. Be sure to address the questions above in the presentation.
Expert Solution
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Step 1
Net Present Value - It is the difference between the present value of cash outflow and present value of cash inflow over the life of the project.
For this we may use the present value factor, it can be calculated as = 1/(1+r)^1 +1/(1+r)^2 + 1/(1+r)^3 + 1/(1+r)^n
PAYBACK PERIOD
Payback period is the period in which money invested in capital asset is recovered for example is we acquire the asset for 10000 and annual cash in flow is 1000 then pay back period is 10 years i.e. 10000/1000
Formula for Payback period = Actual cost of asset / Annual cash inflow
Benefit to Cost ratio is often used Capital budgeting decision, it is the ratio which suggest the project viability. If the B/C Ratio is greater than 1 then it usually have positive Net present value.
It can be calculated as B/C Ratio= Present Value of Cash Inflow / Initial cash Outflow.
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