In eight years, Kent Duncan will retire. He has $320,000 to invest, and he is ex
ID: 2557234 • Letter: I
Question
In eight years, Kent Duncan will retire. He has $320,000 to invest, and 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, Kent has determined the following a. A building, in which a car wash could be installed, is available under an eight-year lease at a cost of $3,000 per month be sold for about 10% of its original cost. supplies, change funds, and so forth. After eight years, this working capital would be released for b. Purchase and installation costs of equipment would total $320,000. In eight years, the equipment could c. An investment of an additional $5,000 would be required to cover working capital needs for cleaning d. Both a car wash and a vacuum service would be offered, with a wash costing $3 and the vacuum e. The only variable costs associated with the operation would be 34 cents per wash for water and 40 f. In addition to rent, monthly costs of operation would be as follows: cleaning, $740 insurance, $170 g. Gross receipts from the car wash would be about $3,300 per week. According to the experience of other h. Kent will not open the car wash unless it provides at least a 10% return, since this is the amount that investment elsewhere costing 80 cents per use cents per use of the vacuum for electricity maintenance, $1,060 car washes, 70% of the customers using the wash would also use the vacuum. could be earned by simply placing the $320,000 in high-grade securities Click here to view Exhibit 10-1 and Exhibit 10-2, to determine the appropriate discount factor(s) using tables equired: 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.) Net annual cash receipts 2-a. Compute the NPV using the method of investment analysis. (Round discount factor(s) to 3 decimal places. Round other intermediate calculations and final answer to the nearest whole number.) Net present value 2-b.Would you advise Kent to open the car wash? O Yes 0Explanation / Answer
Answer 1. Calculation of Net Annual Cash Flow Average Weekly use of Car Wash and Vaccums: Gross Per Use Uses Car Wash 3,300.00 3.00 1,100.00 Vacuums 616.00 0.80 770.00 Expected net annual cash flow from Car Wash = 1100 Nos X 52 weeks X $3 171,600.00 Vacuums = 770 Nos X 52 Weeks X $0.80 32,032.00 Total Cash Receipts 203,632.00 Less: Cash Disbursements Variable Cost: Car Wash = 1100 Nos X 52 weeks X $0.34 19,448.00 Vacuums = 770 Nos X 52 Weeks X $0.40 16,016.00 35,464.00 Fixed Cost: Building Leases - $3000 X 12 36,000.00 Cleaning - $740 X 12 8,880.00 Insurance - $170 X 12 2,040.00 Maintenace - $1060 X 12 12,720.00 59,640.00 Total Cash Disbursement 95,104.00 Annual Net Cash Flow from operation 108,528.00 Calculation of NPV Particulars Year 10% Factor Net Cash Flow Present value A B C C X D Cash Inflow Annual Net Cash Inflow 1-8 5.335 108,528.00 578,997 Salvage Value of Equipment 8 0.467 32,000.00 14,944 Release of Working Capital 8 0.467 5,000.00 2,333 A. Total Cash Inflow - PV 596,273 Cash Outflow Cost of Equipment 0 1.00 320,000.00 320,000 Working Capital Requirement 0 1.00 5,000.00 5,000 B. Total Cash Outflow - PV 325,000 NPV (A - B) 271,273 Mr. Duncan should open the Workshop (NPV is Postive)