# Question

Chippewa County Jail currently has its laundry done by a local cleaner at an annual cost of $46,000. It is considering a purchase of washers, dryers, and presses at a total installed cost of $52,000 so that inmates can do the laundry. The county expects savings of $15,000 per year, and it expects the machines to last 5 years. The required rate of return is 10%.

Answer each part separately.

1. Compute the NPV of the investment in laundry facilities.

2. a. Suppose the machines last only 4 years. Compute the NPV.

b. Suppose the machines last 7 years. Compute the NPV.

3. a. Suppose the annual savings are only $12,000. Compute the NPV.

b. Suppose the annual savings are $18,000. Compute the NPV.

4. a. Compute the most optimistic estimate of NPV, combining the best outcomes in numbers 2 and 3.

b. Compute the most pessimistic estimate of NPV, combining the worst outcomes in numbers 2 and 3.

5. Accept the expected life estimate of 5 years. What is the minimum annual savings that would justify the investment in the laundry facilities?

Answer each part separately.

1. Compute the NPV of the investment in laundry facilities.

2. a. Suppose the machines last only 4 years. Compute the NPV.

b. Suppose the machines last 7 years. Compute the NPV.

3. a. Suppose the annual savings are only $12,000. Compute the NPV.

b. Suppose the annual savings are $18,000. Compute the NPV.

4. a. Compute the most optimistic estimate of NPV, combining the best outcomes in numbers 2 and 3.

b. Compute the most pessimistic estimate of NPV, combining the worst outcomes in numbers 2 and 3.

5. Accept the expected life estimate of 5 years. What is the minimum annual savings that would justify the investment in the laundry facilities?

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