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?




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  • CreatedNovember 19, 2014
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