In five years, Kent Duncan will retire. He is exploring the possibility of openi
ID: 2569339 • Letter: I
Question
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 has determined the following:
a. A building in which a car wash could be installed is available under a five-year lease at a cost of $1,700 per month.
b. Purchase and installation costs of equipment would total $200,000. In five years the equipment could be sold for about 10% of its original cost.
c. 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.
d. Both a wash and a vacuum service would be offered with a wash costing $2.00 and the vacuum costing $1.00 per use.
e. The only variable costs associated with the operation would be 20 cents per wash for water and 10 cents per use of the vacuum for electricity.
f. In addition to rent, monthly costs of operation would be: cleaning, $450; insurance, $75; and maintenance, $500.
g. Gross receipts from the wash would be about $1,350 per week. According to the experience of other car washes, 60% of the customers using the wash would also use the vacuum.
Mr. Duncan will not open the car wash unless it provides at least a 10% return.
Click here to view Exhibit 8B-1 and Exhibit 8B-2, to determine the appropriate discount factor(s) using tables.
Required:
1. Assuming that the car wash will be open 52 weeks a year, compute the expected annual net cash receipts from its operation
Explanation / Answer
Particulars Amount ($) Amount ($) Fross receipts from the wash $1350 / week Washing service cost $2 / wash No. of wash customers per week 675 No. of customers using vacuum / week (60%) 405 Revenue for 52 weeks: Wash service ( $1350 * 52 weeks) 70200 Vaccum service ( 405 customers * 52 * $1) 21060 91260 Variable Costs: Wash service (675 customers * 52 weeks * $0.2) 17550 Vacuum electricity ( 405 * 52 * $0.1) 2106 19656 Gross Profit 71604 Other operating costs: Lease ($1700 * 12 months) 20400 Cleaning ($450 * 12 months) 5400 Insurance ($75 * 12 months) 900 Maintenance ($500 * 12 months) 6000 32700 Expected annual net cash receipts 38904 Note: Depreciation is ignored as it is a non-cash expense and is considered only for tax shield purpose. Please hit the like button if the answer helped you else leave a comment for further clarification. Thank you! All the best!