Chapter 21, Problem 21.38P

Payback methods, even and uneven cash flows. Sage 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.

Sage estimates the cost of the new equipment at $159,000. The equipment has a useful life of 9 years. Sage expects cash fixed costs of $80,000 per year to operate the new machines, as well as cash variable costs in the amount of 5% of revenues. Sage evaluates investments using a cost of capital of 10%.

1. 1. Calculate the payback period and the discounted payback period for this investment, assuming Sage expects to generate $140,000 in incremental revenues every year from the new machines.

  Required

1. 2. Assume instead that Sage expects the following uneven stream of incremental 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?