Cardinal Laundromat is trying to enhance the services it provides to customers, mostly college students. It is looking into the purchase of new high-efficiency washing machines that will allow for the laundry’s status to be checked via smartphone. Cardinal estimates the cost of the new equipment at $ 186,000. The equipment has a useful life of 9 years. Cardinal expects cash fixed costs of $ 82,000 per year to operate the new machines, as well as cash variable costs in the amount of 5% of revenues. Cardinal evaluates investments using a cost of capital of 6%.

1. Calculate the payback period and the discounted payback period for this investment, assuming Cardinal expects to generate $ 180,000 in revenues every year from the new machines.
2. Assume instead that Cardinal expects the following uneven stream of cash revenues from installing the new washing machines:

Based on this estimated revenue stream, what are the payback and discounted payback periods for the investment?

  • CreatedMay 14, 2014
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