Question

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.

Answer 1

Purchase price $        240,000

Net Cash flow per year  $          30,000

Year5

ROI5%

Calculation of NPV:

YearCash flowPV Factor 5% =1/((1+5%)^time)Present value

0 $       (240,000)1 $     (240,000)

1 $            30,000                                                        0.95 $          28,571

2 $            30,000                                                        0.91 $          27,211

3 $            30,000                                                        0.86 $          25,915

4 $            30,000                                                        0.82 $          24,681

5 $            30,000                                                        0.78 $          23,506

Nat present value $     (110,116)

Payback period calculation:-Initial Investment/Annual Payback

Initial Investment $        240,000

Annual Payback $          30,000

Payback period (Years)                        8

This is not a good investment because there is NPV is negative and payback period is 8 years.

Best price should be $ 129,884.