Homework 10 - Chapter 13

Question:

In ve years, Kent Duncan will retire. He 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: A building in which a car wash could be installed is available under a five-year lease at a cost of $5,800 per month. Purchase and installation costs of equipment would total $205,000. In five years the equipment could be sold for about 6% of its original cost. An investment of an additional $2,000 would be required to cover working capital needs for cleaning supplies, change funds, and so forth. After five years, this working capital would be released for investment elsewhere. Both a wash and a vacuum service would be offered with a wash costing $1.30 and the vacuum costing $0.68 per use. The only variable costs associated with the operation would be 7.5 cents per wash for water and 10 cents per use of the vacuum for electricity. In addition to rent, monthly costs of operation would be: cleaning, $4,100; insurance, $125; and maintenance, $1,825. Gross receipts from the wash would be about $3,250 per week. According to the experience of other car washes, 60% 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 6% return. Required: 1. Assuming that the car wash will be open 52 weeks a year, compute the expected annual net cash receipts from its operation. Auto wash cash receipts Vacuum cash receipts Total cash receipts Less cash disbursements: Water Electricity Rent Cleaning Insurance Maintenance Total cash disbursements Annual net cash ow from operations 2-a. Determine the net present value using the net present value method of investment analysis. (Any cash outflows should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to the nearest dollar amount.) Cost of the equipment Working capital Net annual cash inows 1-5 Working capital release 5 Salvage value 5 Net present value 2b. Would you advise Mr. Duncan to open the car wash? 0 Yes 0 No