Lejla Dizdarevic
ID#100061856
BUS221b
Prof.Feeney
Case#2
The purchase price of the self-service laundry business is $1.3 million, with cash down payment of
$350,000. The business consists of $1,000,000 equipment, $ 25,000 card system and the store lease.
Costs are triple net monthly rent, $6,000 advertising expenses and $ 6,800 accounting, payroll and
professional fees and other expenses such as electricity, water, gas, machine etc. The laundry business
has $ 1,008,000 of annual sales.
The budgeted balance sheet projects the financial position of the company as of the end of the year. In
order to prepare it, we need to adjust the beginning balances of long-term asset, liability, and
stockholders' equity accounts for expected activity during the budgeted period, and then identify
balances in current asset and liability accounts at the end of the period. The budgeted balance sheet is
extremely useful for testing whether the projected financial position of the company appears to be
reasonable and for revealing scenarios that are not financially supportable, such as requiring large
amounts of debt), which management can remedy by altering the underlying budget.
The budgeted income statement is prepared after the operating budgets have been completed. It shows
the company's planned profit for the upcoming budget period, and it stands as a benchmark against
which subsequent company performance can be measured. The budgeted income statement is a
projection of what the income statement will look like during future budget periods. Furthermore, the
budgeted income statement is extremely useful for testing whether the projected financial results of the
company appear to be reasonable. When used in combination with the budgeted balance sheet, it also
reveals scenarios that are not financially supportable, as previously mentioned.
The business owner prepares the cash budget on a monthly basis and looks at the cash the firm takes in
versus the cash the firm takes out. This document literally lets the business owner know how much cash
is available to the firm at the end of each month and if the firm has to borrow or can repay previously
borrowed funds. In effect, the cash budget is a short-term financial statement, looking at monthly or
quarterly cash data. Just like the income statement and balance sheet, the cash flow statement can also
be drawn up in budget form and later compared to actual figures. These budgeted figures would be
drawn up based on actual figures from past years, but taking into account any expected future changes
in cash flows.
Break-even analysis is used to determine the point at which revenue received equals the costs
associated with receiving the revenue. Break-even analysis calculates what is known as a margin of
safety, the amount that revenues exceed the break-even point. This is the amount that revenues can fall
while still staying above the break-even point.
The net present value (NPV) or of a time series of cash flows, both incoming and outgoing, is defined as
the sum of the present values (PVs) of the individual cash flows of the same entity. NPV is an indicator of
how much value an investment or project adds to the firm. With a particular project, if is a positive
value, the project is in the status of positive cash inflow in the time of t. If is a negative value, the
project is in the status of discounted cash outflow in the time of t. Appropriately risked projects with a
positive NPV could be accepted. This does not necessarily mean that they should be undertaken since
NPV at the cost of capital may not account for opportunity cost, i.e. comparison with other available
investments. In financial theory, if there is a choice between two mutually exclusive alternatives, the
one yielding the higher NPV should be selected.
Payback Period is the length of time required to recover the cost of an investment. The payback period
of a given investment or project is an important determinant of whether to undertake the position or
project, as longer payback periods are typically not desirable for investment positions. It is calculated as
cost of project over annual cash inflows. Payback period in capital budgeting refers to the period of time
required for the return on an investment to "repay" the sum of the original investment. Payback period
intuitively measures how long something takes to "pay for itself." All else being equal, shorter payback
periods are preferable to longer payback periods. Payback period is widely used because of its ease of
use despite the recognized limitations described below.
Rate of return (ROR), also known as return on investment (ROI), usually presented as percentage, is the
ratio of money gained or lost (whether realized or unrealized) on an investment relative to the amount
of money invested. Gains on investments are considered to be any income received from the security
plus realized capital gains. It can be used to measure virtually any investment vehicle, from real estate to
bonds and stocks to fine art, provided the asset is purchased at one point in time and then produces
cash flow at some time in the future. Financial securities are commonly judged based on their past rates
of return, which can be compared against assets of the same type to determine which investments are
the most attractive.
The internal rate of return (IRR) is a rate of return used in capital budgeting to measure and compare
the profitability of investments. It is also called the discounted cash flow rate of return (DCFROR). The
internal rate of return on an investment or project is the "annualized effective compounded return rate"
or "rate of return" that makes the net present value of all cash flows, both positive and negative, from a
particular investment equal to zero. In more specific terms, the IRR of an investment is the discount rate
at which the net present value of costs (negative cash flows) of the investment equals the net present
value of the benefits (positive cash flows) of the investment. Generally speaking, the higher a project's
internal rate of return, the more desirable it is to undertake the project. Furthermore, IRR can be used
to rank several prospective projects a firm is considering.
IRRs can also be compared against prevailing rates of return in the securities market. If a firm
can't find any projects with IRRs greater than the returns that can be generated in the financial markets,
it may simply choose to invest its retained earnings into the market.
Overall, I think it is a good idea to make an investment in this type of business. First, some of them
require just a couple of hours a week and they are so easy to operate that basically anyone, anywhere
can own one or more. Laundry can stay open 24 hours a day, with an automatic door-locking system on
a timer set to open and close when you choose, which can work so good with the customers. Another
benefit is that you can own a laundry near your home or further away. New customers are easily
attracted as well. High return on investment, liquidity, tax benefits, and fast growing equity can be
expected.
The fact is: people will always need to wash their clothes, which is why laundry centers thrive in periods
of both growth and recession, when people are unable to repair or replace washing and drying
machines. Surely customers will love the facility to leave their laundry, take their favorite Starbucks
coffee and then wait for the text message that will inform them at what time they should exactly come,
so in that way decrease the time waiting in the laundry and spend it more effectively. With the primary
customer representing the fastest growing segment in the nation - the laundry business is amazingly
stable, and dependably profitable. After all, families need clean towels and sheets whether the stock
market is up or down. They need clean clothes in summer and winter, on vacation or working, whether
they’re newborns, teenagers or retired.