In five years, Kent Duncan willretire. He is exploring the possibility of openin
ID: 2393919 • Letter: I
Question
In five years, Kent Duncan willretire. He is exploring the possibility of opening a self-service car wash. The managed in the free study, Mr. Duncan determined the following: time he has available from his regular occupation, and it could be closed easily when he retires. After careful a. 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. b. 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. c. An investment of an additional $4,000 would be requi red to cover working capital needs for cleaning supplies, change funds, and forth. After five years, this working capital would be released for investment elsewhere. cleaner The only variable costs associated with the operation would be 7.5 cents per wash for wateT and 10 cents per use of the vacuum for service would be offered. Each customer would pay $1.12 for a wash and $.55 for access to a vacuum e. t. In addition to rent, monthly costs of operation would be: cleaning, $4,900; insurance, $125; and maintenance, $1,825 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.Explanation / Answer
1) Customers using wash per week = Gross receipts from wash per week/Rate per wash
= $3,472/$1.12 = 3,100 customers
Customers using vacuum per week = 3,100 customers*60% = 1,860 customers
Calculation of expected annual net cash receipts (Amounts in $)
2a) Sale value of equipment after 5 yrs = $240,000*10% = $24,000
Net present value = Present value of cash inflows - Present value of cash outflows
PV of cash inflows = PV of annual cash inflows+PV of sale value after 5 yrs+PV of working capital released
= [Annual cash inflows*PVAF(12%, 5 yrs)]+[Sale value*PVF(12%, 5 yrs)]+[Working capital*PVF(12%, 5 yrs)]
= ($62,578*3.60478)+($24,000*0.56743)+($4,000*0.56743)
= $225,580+$13,618+$2,270 = $241,468
PV of cash outflows = Cost of equipment+Working capital
= $240,000+$4,000 = $244,000
Net present value = $241,468 - $244,000 = -$2,532
2b) As the net present value of opening the car wash is negative (i.e. $2,532), Mr. Duncan should not open the car wash.
Auto wash cash receipts ($3,100*$1.12*52 weeks) 180,544 Vacuum cash receipts (1,860*$0.55*52 weeks) 53,196 Total cash receipts (A) 233,740 Less: Cash disbursements Water (3,100*$0.075*52 weeks) 12,090 Electricity (1,860*$0.10*52 weeks) 9,672 Rent ($5,600 per month*12 months) 67,200 Cleaning ($4,900 per month*12 months) 58,800 Insurance ($125 per month*12 months) 1,500 Maintenance ($1,825 per month*12 months) 21,900 Total cash disbursements (B) 171,162 Annual net cash flow from operations (A-B) 62,578