Entrepreneur, you are starting a car wash as a new business and your investors want to see a pro-forma income statement. You have done extensive market research and financial analysis and have determined the following:

1. You will have three services (prices and expected monthly demand included):

a. The basic wash - $10.00

b. The basic wash + wax - $14.00

c. The basic wash + wax + interior clean - $16.00

2. You will operate 7 am to 11 pm – 7 days a week. You expect to average 2 customers per hour over the time you are open. You expect the sales mix to be 50% Basic, 30% Basic + Wax, 20% Basic + Wax + Interior (when entering volumes – round down to the next lowest “10” – (e.g. 92 = 90)

3. Issues with cleaning/customer complaints will result in sales refunds of 2.5% of revenue.

4. The cost of materials is as follows:

a. The basic wash – $2.00

b. The basic wash + wax - $3.00

c. The basic wash + wax + interior clean - $3.50

5. Operating expenses include:

a. Caretakers/cashiers salary - $5,000/month

b. Maintenance contract for equipment - $1,000/month

c. Insurance - $500/Quarter

d. Utilities - $700/month

e. Accounting and administration - $300/month

6. The initial cost of your building and equipment is $200,000 (with a $20,000 salvage value). You estimate the useful life at 15 years and want to depreciate straight-line.

7. You have a bank loan of $60,000 used in the purchase of equipment. Your annual interest rate is 5%.

8. Your tax rate is 20%.

ANSWER THE FOLLOWING:

1. For any of the years (i.e. total for the year), what is the:

a. Gross Margin $

b. Gross Margin %

c. EBITDA $ 

d. Operating Income $ 

e. Net Income $

2. A few customers have contacted you and said that if you lowered your prices, they would get their cars washed more often. You have done some quick market research and estimated that if you lower your prices by $2.00 on each service – your monthly demand would increase by 25% for each of the services. What is the impact (i.e. total increase or decrease) of doing this on:

a. Cumulative 3 year Gross Margin $ 

b. Cumulative 3 year Net Income $ 

c. Should you make the changes? Why or why not? 

3. Your only local competitor has approached you and made you an offer – they want to retire and move to Florida. They have tried to sell their car wash, but the equipment is older and there are not any serious buyers. Their offer – if you pay them a flat fee of $35,000 per year for the next three years – they will exit the market. Based on having market share dominance, you project that your average customers per hour will increase from 2 to 4 (with the same service sales mix) without a reduction in price. Should you accept the deal? Why or why not? 

Answer rating: 100% (QA)

To answer the questions well need to calculate the various financial metrics for each scenario Lets start by calculating the financials for the first year Financials for the First Year Total hours of ... View the full answer