In five 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 determined the following:

1. A building in which a car wash could be installed is available under a five-year lease at a cost of $5,600 per month.

2. Purchase and installation costs of equipment would total $240,000. In five years the equipment could be sold for about 10% of its original cost.

3. An investment of an additional $4,000 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.

4. Both a wash and a vacuum service would be offered. Each customer would pay $1.12 for a wash and $.55 for access to a vacuum cleaner.

5. 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.

6. In addition to rent, monthly costs of operation would be: cleaning, $4,900; insurance, $125; and maintenance, $1,825.

7. Gross receipts from the wash would be about $3,472 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 12% return.

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

Required:

1. Assuming that the car wash will be open 52 weeks a year, compute the expected annual net cash receipts from its operation.

2-a. Determine the net present value using the net present value method of investment analysis.

2-b. Would you advise Mr. Duncan to open the car wash?

Present Value of 1 Table

n	1%	2%	3%	4%	5%	6%	8%	10%	12%
1	0.9901	0.9804	0.9709	0.9615	0.9524	0.9434	0.9259	0.9091	0.8929
2	0.9803	0.9612	0.9426	0.9246	0.9070	0.8900	0.8573	0.8265	0.7972
3	0.9706	0.9423	0.9151	0.8890	0.8638	0.8396	0.7938	0.7513	0.7118
4	0.9610	0.9239	0.8885	0.8548	0.8227	0.7921	0.7350	0.6830	0.6355
5	0.9515	0.9057	0.8626	0.8219	0.7835	0.7473	0.6806	0.6209	0.5674
6	0.9421	0.8880	0.8375	0.7903	0.7462	0.7050	0.6302	0.5645	0.5066
7	0.9327	0.8706	0.8131	0.7599	0.7107	0.6651	0.5835	0.5132	0.4524
8	0.9235	0.8535	0.7894	0.7307	0.6768	0.6274	0.5403	0.4665	0.4039
9	0.9143	0.8368	0.7664	0.7026	0.6446	0.5919	0.5003	0.4241	0.3606
10	0.9053	0.8204	0.7441	0.6756	0.6139	0.5584	0.4632	0.3855	0.3220
11	0.8963	0.8043	0.7224	0.6496	0.5847	0.5268	0.4289	0.3505	0.2875
12	0.8875	0.7885	0.7014	0.6246	0.5568	0.4970	0.3971	0.3186	0.2567
13	0.8787	0.7730	0.6810	0.6006	0.5303	0.4688	0.3677	0.2897	0.2292
14	0.8700	0.7579	0.6611	0.5775	0.5051	0.4423	0.3405	0.2633	0.2046
15	0.8614	0.7430	0.6419	0.5553	0.4810	0.4173	0.3152	0.2394	0.1827
16	0.8528	0.7285	0.6232	0.5339	0.4581	0.3937	0.2919	0.2176	0.1631
17	0.8444	0.7142	0.6050	0.5134	0.4363	0.3714	0.2703	0.1978	0.1456
18	0.8360	0.7002	0.5874	0.4936	0.4155	0.3503	0.2503	0.1799	0.1300
19	0.8277	0.6864	0.5703	0.4746	0.3957	0.3305	0.2317	0.1635	0.1161
20	0.8195	0.6730	0.5537	0.4564	0.3769	0.3118	0.2146	0.1486	0.1037
21	0.8114	0.6598	0.5376	0.4388	0.3589	0.2942	0.1987	0.1351	0.0926
22	0.8034	0.6468	0.5219	0.4220	0.3419	0.2775	0.1839	0.1229	0.0826
23	0.7954	0.6342	0.5067	0.4057	0.3256	0.2618	0.1703	0.1119	0.0738
24	0.7876	0.6217	0.4919	0.3901	0.3101	0.2470	0.1577	0.1015	0.0659
25	0.7798	0.6095	0.4776	0.3751	0.2953	0.2330	0.1460	0.0923	0.0588

Present Value of an Ordinary Annuity of 1

n	1%	2%	3%	4%	5%	6%	8%	10%	12%
1	0.9901	0.9804	0.9709	0.9615	0.9524	0.9434	0.9259	0.9091	0.8929
2	1.9704	1.9416	1.9135	1.8861	1.8594	1.8334	1.7833	1.7355	1.6906
3	2.9410	2.8839	2.8286	2.7751	2.7233	2.6730	2.5771	2.4869	2.4018
4	3.9020	3.8077	3.7171	3.6299	3.5460	3.4651	3.3121	3.1699	3.0374
5	4.8534	4.7135	4.5797	4.4518	4.3295	4.2124	3.9927	3.7908	3.6048
6	5.7955	5.6014	5.4172	5.2421	5.0757	4.9173	4.6229	4.3553	4.1114
7	6.7282	6.4720	6.2303	6.0021	5.7864	5.5824	5.2064	4.8684	4.5638
8	7.6517	7.3255	7.0197	6.7327	6.4632	6.2098	5.7466	5.3349	4.9676
9	8.5660	8.1622	7.7861	7.4353	7.1078	6.8017	6.2469	5.7590	5.3283
10	9.4713	8.9826	8.5302	8.1109	7.7217	7.3601	6.7101	6.1446	5.6502
11	10.3676	9.7869	9.2526	8.7605	8.3064	7.8869	7.1390	6.4951	5.9377
12	11.2551	10.5753	9.9540	9.3851	8.8633	8.3838	7.5361	6.8137	6.1944
13	12.1337	11.3484	10.6350	9.9857	9.3936	8.8527	7.9038	7.1034	6.4236
14	13.0037	12.1063	11.2961	10.5631	9.8986	9.2950	8.2442	7.3667	6.6282
15	13.8651	12.8493	11.9380	11.1184	10.3797	9.7123	8.5595	7.6061	6.8109
16	14.7179	13.5777	12.5611	11.6523	10.8378	10.1059	8.8514	7.8237	6.9740
17	15.5623	14.2919	13.1661	12.1657	11.2741	10.4773	9.1216	8.0216	7.1196
18	16.3983	14.9920	13.7535	12.6593	11.6896	10.8276	9.3719	8.2014	7.2497
19	17.2260	15.6785	14.3238	13.1339	12.0853	11.1581	9.6036	8.3649	7.3658
20	18.0456	16.3514	14.8775	13.5903	12.4622	11.4699	9.8182	8.5136	7.4694
21	18.8570	17.0112	15.4150	14.0292	12.8212	11.7641	10.0168	8.6487	7.5620
22	19.6604	17.6581	15.9369	14.4511	13.1630	12.0416	10.2007	8.7715	7.6447
23	20.4558	18.2922	16.4436	14.8568	13.4886	12.3034	10.3711	8.8832	7.7184
24	21.2434	18.9139	16.9355	15.2470	13.7986	12.5504	10.5288	8.9847	7.7843
25	22.0232	19.5235	17.4132	15.6221	14.0939	12.7834	10.6748	9.0770	7.8431
26	22.7952	20.1210	17.8768	15.9828	14.3752	13.0032	10.8100	9.1610	7.8957
27	23.5596	20.7069	18.3270	16.3296	14.6430	13.2105	10.9352	9.2372	7.9426
28	24.3164	21.2813	18.7641	16.6631	14.8981	13.4062	11.0511	9.3066	7.9844
29	25.0658	21.8444	19.1885	16.9837	15.1411	13.5907	11.1584	9.3696	8.0218
30	25.8077	22.3965	19.6004	17.2920	15.3725	13.7648	11.2578	9.4269	8.0552