P10–12 Opening a small business; net present value Time allowed: 30 minutes In eight years, John Duncan will retire. He has £150,000 to invest, and is exploring the possibility of opening a self-service car wash. The car wash could be managed in the free time he has available from his regular occupation, and it could be closed easily when he retires. After careful study, Mr Duncan has determined the following:

1 A building in which a car wash could be installed is available under an eight-year lease at a cost of £1,700 per month.

2 Purchase and installation costs of equipment would total £150,000. In eight years the equipment could be sold for about 10% of its original cost.

3 An investment of an additional £2,000 would be required to cover working capital needs for cleaning supplies, change funds, and so forth. After eight years, this working capital would be released for investment elsewhere.
4 Both a car wash and a vacuum service would be offered with a wash costing £1.50 and the vacuum costing 25 pence per use.
5 The only variable costs associated with the operation would be 23 pence per wash for water and 10 pence per use of the vacuum for electricity.
6 In addition to rent, monthly costs of operation would be: cleaning, £450;
insurance, £75; and maintenance, £500.
7 Gross receipts from the car wash would be about £1,350 per week.
According to the experience of other car washes, 70% of the customers using the wash would also use the vacuum.
Mr Duncan will not open the car wash unless it provides at least a 10%
return, since this is the amount that could be earned by simply placing the £150,000 in high-grade securities.

Required (ignore taxes)
1 Assuming that the car wash will be open 52 weeks a year, compute the expected net annual cash receipts (gross cash receipts less cash disbursements) from its operation. (Do not include the cost of the equipment, the working capital, or the salvage value in these computations.)
2 Would you advise Mr Duncan to open the car wash? Show computations using the net present value method of investment analysis. Round all pound figures to the nearest whole pound.