Question

In five years, Kent Duncan will retire. He is explorong 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 $5,700 per month b. Purchase and installation costs of equipment would total $181,000. In five years the equipment could be sold for about 10% of its original cost. C. An investment of an additional $9,000 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 $1.10 for a wash and $.65 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 In addition to rent, monthly costs of operation would be cleaning. $3,000; insurance, $75; and maintenance, $1,785. g. Gross receipts from the wash would be about $2,640 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. 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. 2-b. Would you advise Mr. Duncan to open the car wash? Complete this question by entering your answers in the tabs below. Reg 1 Reg 2A Req 28 Assuming that the car wash will be open 52 weeks a year, compute the expected annual net cash receipts from its operation Auto wash cash receipts Vacuum cash receipts Total cash receipts Less cash disbursements Water

Answer 1

Facts:

Equipment	$181,000
Life	5 years
Residual Value @10%	$18,100
Working capital	$9,000
Expected return	11%

Working Note
No of car washes;Vacuum cleaning during the year	Gross receipts/SP
	137280/1.1 ; 82368/0.65
No of car washes	124800
No of Vacuum cleaning	126720

Auto Wash Cash receipts (2640*52)	$      137,280
Vacuum Cash receipts (2640*60%*52)	$         82,368
Total Cash receipts	$      219,648
Less: cash disbursements
Water (124800*.075) WN	$           9,360
Electricity (126720*.10) WN	$         12,672
Rent(5700*12)	$         68,400
Cleaning (3000*12)	$         36,000
Insurance (75*12)	$              900
Maintenance (1785*12)	$         21,420
Total	$      148,752
Net Cash receipts from operations	$        70,896

Calculation of NPV
Year	Particulars	Net Cash flows	PVF@11%	PV cash flows
0	Investment & working capital	($190,000)	1	($190,000)
1	Net receipts	$         70,896	0.90090	$   63,870
2	Net receipts	$         70,896	0.81162	$   57,541
3	Net receipts	$         70,896	0.73119	$   51,839
4	Net receipts	$         70,896	0.65873	$   46,701
5	Net receipts	$         70,896	0.59345	$   42,073
5	Working cap & residual value	$         27,100	0.59345	$   16,083
			NPV	$88,107

As we can observe NPV is positive, it is advisable for Duncan to go ahead with his plan of opening self-service car wash centre.