Question

You're presented with the option of running a laundromat for the next 5 years of your life. In order to run the business, you need to cover 15,249.7 of past due taxes (that were meant to be paid a year ago), and also need to put in 102,571.5 of money. At the end of 5 years, the business is expected to be worth about 192,011.1, and makes a yearly income of 82,925.9, with yearly expenses of $51,340 and a yearly tax of $5,240. What is the annual worth of this business (assuming you sell it at the end of it's life) if the WACC is 5%? (Answer in the question box below). Draw a cash flow diagram of this, and also calculate the IRR of this business opportunity (Answer

Answer 1

First cost = Tax due + investment = 15,249.7 + 102,571.5 = 117,821.2

Annual net benefit, years 1-4 = Income - Expense - Tax = 82,925.9 - 51,340 - 5,240 = 26,345.9

Annual net benefit, year 5 = 26,345.9 + 192,011.1 (salvage value) = 218,357

(1)

PW = - 117,821.2 + 26,345.9 x P/A(5%, 4) + 218,357 x P/F(5%, 5)

= - 117,821.2 + 26,345.9 x 3.546** + 218,357 x 0.7835**

= - 117,821.2 + 93,422.56 + 171,082.71

= 146,684.07

So,

AW = PW / P/A(5%, 5) = 146,684.07 / 4.3295** = 33,880.14

(2)

Cash flow diagram (values in $). Note that

Total cost = Expense + Tax = 51,340 + 5,240 = 56,580

Revenue, years 1-4 = 82,925.9

Revenue, year 5 = 82,925.9 + 192,011.1 (salvage value) = 274,937

56580 56580 S6580 56580 SC580 17821.2 3 4 82925.9 274937 22925.9 8 2925.9 82925.9

(3)

IRR is computed using Excel IRR formula as follows.

Year	Net cash flow ($)
0	-1,17,821.2
1	26,345.9
2	26,345.9
3	26,345.9
4	26,345.9
5	1,17,821
IRR =	19.32%