Question: Cardinal Laundromat is trying to enhance the services it provides

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%.

Required
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?


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  • CreatedMay 14, 2014
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