Your Neighborhood Laundromat Is For Sale And A Friend Is Con

Your Neighborhood Laundromat Is For Sale And A Friend Is Considering

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 5%. You will need to submit a presentation sharing your recommendation. You will need to address the following questions: What is the net present value of this project? Use the calculations covered in this week’s Video to calculate the net present value. Calculate the simple payback period for this project. Your desired payback period is 5 years. How long is the payback period for this project? How would you evaluate this investment? What would be a good price at which to purchase this business? Prepare the calculations to determine if the laundromat is a good investment. 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.

Paper For Above instruction

Net Present Value and Investment Analysis of a Laundromat Purchase

The decision to purchase a laundromat involves rigorous financial analysis to determine its viability as an investment. Key financial metrics such as net present value (NPV) and payback period serve as vital tools in assessing whether the investment aligns with the investor’s financial goals and risk appetite. This paper provides a comprehensive evaluation of the proposed laundromat acquisition, including calculations of NPV, payback period, and determining a fair purchase price.

Introduction

Investing in a small business like a laundromat requires understanding its cash flow dynamics and assessing whether the expected returns justify the initial expenditure. The specifics of this case include a purchase price of $250,000, annual net cash flows of $30,000 over five years, and an assumed borrowing rate of 5%. These parameters form the foundation for calculating the investment’s attractiveness through NPV and payback period analysis.

Net Present Value Calculation

Net present value is the difference between the present value of cash inflows and outflows over a period, discounted at the project’s cost of capital—in this case, 5%.

The formula for NPV is:

NPV = (Cash Flow / (1 + r)^t) - Initial Investment

where:

• Cash Flow = $30,000
• r = 5% (discount rate)
• t = year number (1 to 5)

Calculations:

• Year 1: $30,000 / (1.05)^1 = $28,571.43
• Year 2: $30,000 / (1.05)^2 = $27,210.39
• Year 3: $30,000 / (1.05)^3 = $25,919.42
• Year 4: $30,000 / (1.05)^4 = $24,684.68
• Year 5: $30,000 / (1.05)^5 = $23,512.55

The sum of discounted cash flows is:

$28,571.43 + $27,210.39 + $25,919.42 + $24,684.68 + $23,512.55 = $129,898.47

Therefore, the NPV is:

NPV = $129,898.47 - $250,000 = -$120,101.53

This negative NPV indicates the investment would result in a net loss based on the projected cash flows and discount rate.

Payback Period Calculation

The payback period measures how long it takes for cumulative cash flows to recover the initial investment. Here, total cash flows over five years are:

5 years * $30,000 = $150,000

Since $150,000 exceeds the initial cost of $250,000, we calculate the exact year when the cumulative cash flow equals the initial investment:

Annual cash flow: $30,000

Remaining amount after 4 years: $250,000 - 4 * $30,000 = $250,000 - $120,000 = $130,000

In Year 5, cash flow is $30,000, which is less than the remaining $130,000, thus the payback extends into Year 9. But since the total cash flows over 5 years are only $150,000, which is less than initial investment, the payback period exceeds 5 years—meaning the project does not meet the desired payback period.

Investment Evaluation and Purchase Price

Based on the negative NPV and inadequate payback period, this project appears financially unattractive under the current assumptions. A promising investment typically exhibits a positive NPV and a payback period within the desired timeline (5 years in this case).

However, adjusting the purchase price or increasing cash flows could improve attractiveness. For example, if the purchase price were lower than $250,000, or if cash flows increased due to operational improvements, the project's viability could improve.

Given the current data, the maximum price the investor should pay to achieve a breakeven NPV at a 5% discount rate would be approximately $129,898.47, matching the present value of cash inflows, assuming cash flows can be maintained without decline.

Alternatively, for the investment to be viable, either cash flows need to increase, or the purchase price needs to decrease significantly below $129,898.47, which is unlikely at $250,000.

Conclusion

This financial analysis suggests that, based on the projected cash flows and current purchase price, the laundromat investment is not financially justified. The negative NPV and the payback period exceeding five years indicate a poor return on investment under current assumptions. For this opportunity to be viable, either operational improvements should increase cash flows, or the purchase price should be adjusted downward. Investors should exercise caution and consider alternatives or renegotiate terms before proceeding.

References

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