Deal Or No Deal? Your Neighborhood Self-Service Laund 301064

Deal or No Deal? 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. The use of 1 scholarly source

Paper For Above instruction

Investing in a small business such as a neighborhood self-service laundry involves careful financial analysis to determine its viability. The primary financial tools for such evaluation include calculating the net present value (NPV), payback period, and assessing whether the investment aligns with the investor's financial goals. These assessments help determine whether purchasing this business at a given price will be profitable and sustainable.

The initial step is to compute the net present value of the project. The project’s cash flows are expected to be $30,000 annually for 5 years, with an initial purchase price of $240,000. The discount rate, representing the cost of capital or the borrowing rate, is 5%. The NPV formula involves discounting each year's cash flow back to the present and subtracting the initial investment. The formula for NPV is:

NPV = ∑ (Cash flow / (1 + r)^t) - Initial investment

Applying this formula, the present value of each year’s cash flow can be calculated as follows:

  • Year 1: $30,000 / (1 + 0.05)^1 = $28,571.43
  • Year 2: $30,000 / (1 + 0.05)^2 = $27,210.89
  • Year 3: $30,000 / (1 + 0.05)^3 = $25,924.67
  • Year 4: $30,000 / (1 + 0.05)^4 = $24,702.55
  • Year 5: $30,000 / (1 + 0.05)^5 = $23,530.52

Adding these present values yields a total discounted cash inflow of approximately $129,940.07. Subtracting the initial investment of $240,000 gives an NPV of:

NPV = $129,940.07 - $240,000 = -$110,059.93

Since the NPV is negative, at a 5% discount rate, this indicates that the investment would not generate sufficient returns to cover the purchase price, suggesting it may not be a financially sound investment at this price.

Next, the simple payback period measures how long it takes for the initial investment to be recovered solely from cash inflows. The desired period is 5 years, but we need to see how many years it actually takes. The annual cash inflow is $30,000, and the initial investment is $240,000. The payback period is therefore:

Payback period = Initial investment / Annual cash flow = $240,000 / $30,000 = 8 years

This means it would take 8 years to recover the initial investment, which exceeds the investor’s desired payback period of 5 years. As a result, if the investor prioritizes quicker returns, this might not be an attractive investment under current terms.

Finally, evaluating whether this is a good investment involves weighing the negative NPV and the extended payback period against potential strategic benefits or future growth prospects. Given the negative NPV and the payback period exceeding the ideal 5-year threshold, the current purchase price of $240,000 appears high relative to the cash flow generated, and the business may be overvalued.

To determine a more appropriate purchase price, we can set the NPV to zero (the breakeven point) and solve for the maximum purchase price. Discounting the expected cash flows, the present value of inflows over 5 years at a 5% rate is approximately $129,940.07. To break even, the maximum price should be equal to this present value:

Maximum purchase price = $129,940.07

In conclusion, based on the calculations, the business is not a good investment at the current asking price of $240,000. A fair market value, based on discounted cash flows, would be around $130,000 or less to ensure a breakeven or positive return. Investors should consider negotiating the price closer to this valuation or look for opportunities that offer higher cash flows relative to investment costs to ensure profitability.

References

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