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 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 $5,900 per month b. Purchase and installation costs of equipment would total $230,000. In five years the equipment could be sold for about 8% of its original cost c. 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 d. Both a wash and a vacuum service would be offered Each customer would pay $112 for a wash and $.65 for access to a vacuum cleaner e. The only variable costs associated with the operation would be 75 cents per wash for water and 10 cents per use of the vacuum for electricity t. In addition to rent, monthly costs of operation would be cleaning. $4,500; insurance, $75, and maintenance, $1,935 g Gross receipts from the wash would be about $3,248 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 11% return Click here to view Exhibit 138-1 and Exhibit 13B-2. to determine the appropriate discount factor(s) using tables

Answer 1

Ans:

Ans:1
Computation of expected annual cash receipt from operation
Particulars		Amount
Autowash cash receipt(3248*52)		$ 168,896.00
Vacuum cash receipt ($3248/1.12*0.65*60%*52)		$ 58,812.00
Total cash receipt		$ 227,708.00
Less: Cash disbursements:
Water ($3,248/ 1.12 * 0.075*52)	$ 11,310.00
Electricity ($3,248/1.12*60%*0.10*52)	$ 9,048.00
Rent	$ 70,800.00
Cleaning	$ 54,000.00
Insurance	$ 900.00
Maintenance	$ 23,220.00
Total cash disbursements		$ 169,278.00
Annual net cash flow from operations		$ 58,430.00

Ans:2a
Computation of NPV
Particulars	Period	Amount	PV Factor	Present Value
Cash outflows:
Cost of equipment	0	$ 230,000	1	$ 230,000
Working capital	0	$ 4,000	1	$ 4,000
Present value of cash outflows (A)				$ 234,000
Cash Inflows:
Annual cash inflows	1 to 5 years	$ 58,430	3.696	$ 215,957
Salvage value	5	$ 18,400	0.593	$ 10,911
Release of working capital	5	$ 4,000	0.593	$ 2,372
Present value of cash inflow (B)				$ 229,240
NPV (B-A)				$ -4,760

Ans:2b
As NPV is negative, therefore it is not advisable to Mr. Duncan to open the car wash.