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 $4,200 per month. b. Purchase and installation costs of equipment would total $310,000. In five years the equipment could be sold for about 10% of its original cost. c. An investment of an additional $6,000 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 $1.30 for a wash and $.75 for access to a vacuum cleaner. e. 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. f. In addition to rent, monthly costs of operation would be cleaning, $2,700; insurance, $175; and maintenance, $1,735. g. Gross receipts from the wash would be about $2,730 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 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.

Answer 1

Car Wash price / customer	1.3
Vacuum Cleaning price	0.75
Gross receipts From Wash per Week	2730
No. Of Car wash per Week (2730/1.3)	2100
No. of Vacuum Cleaning per week (60%)	1260
No. Of Car wash per annum	109200
No. of Vacuum Cleaning per annum (60%)	65520

(1). Expected Annual Cash Flow

Annual Cash Flow	Amount (in $)
Auto Car wash Receipts (109200*1.3)	141960
Vacuum Cash Receipts (65520*0.75)	49140
Total Cash Receipts	191100
Less: Disbursements
Water (0.075*109200)	8190
Electricity (0.1*65520)	6552
Rent (4200*12)	50400
Cleaning (2700*12)	32400
Insurance (175*12)	2100
Maintenance (1735*12)	20820
Total Cash Disbursements	120462
Net Cash Flow	70638
Depreciation	4650
Net Profit	65988

(2.a) Net Present Value

Cash flow	Amount (in $)
Year 0 ( Investment)	-316000
Year 1	70638
Year 2	70638
Year 3	70638
Year 4	70638
Year 5	101638

required rate of return	11%
NPV	($36,532.24)

(2.b) I would advise Mr. Duncan not to open the car wash as the Net Present value is Negative

The IRR is only 6.52 Which is less than the Required Rate of return