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1. Assuming that the car wash will be open 52 weeks a year, compute the expected annual net cash inflows from its operation. 2-a. What is the net present value of the investment in the car wash? 2-b. Should Mr. Duncan open the car wash?

1. Assuming that the car wash will be open 52 weeks a year, compute the expected annual net cash inflows from its operation. 2-a. What is the net present value of the investment in the car wash? 2-b. Should Mr. Duncan open the car wash?

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Kent Duncan is exploring the possibility of opening a self-service car wash and operating it for the next five years until he retires. He has gathered the following information: a. A building for the car wash is available under a five-year lease for $5,300 per month. b. The car wash equipment costs $400,000 and could be sold in five years for 10% of its original cost. c. The car wash requires a working capital investment of $9,000 for cleaning supplies, change funds, and so forth. After five years, this working capital would be released for investment elsewhere. d. Each customer would pay $1.25 for a wash and $0.55 for access to a vacuum cleaner. e. The only variable costs are 7.5 cents per wash (for water) and 10 cents per use of the vacuum. f. Additional monthly operating costs include cleaning, $3,800; insurance, $75; and maintenance, $1,895. g. Gross receipts from the wash would be $4,000 per week and 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 13% return. Click here to view Exhibit 14B-1 and Exhibit 14B-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 inflows from its operation. 2-a. What is the net present value of the investment in the car wash? 2-b. Should Mr. Duncan open the car wash? Complete this question by entering your answers in the tabs below. Required 1 Required 2A Required 2B Assuming that the car wash will be open 52 weeks a year, compute the expected annual net cash inflows from its operation. Auto wash cash receipts Vacuum cash receipts Total cash receipts Less cash disbursements Water Electricity Rent Cleaning Insurance Maintenance Total cash disbursements 0 0
Transcribed Image Text:Kent Duncan is exploring the possibility of opening a self-service car wash and operating it for the next five years until he retires. He has gathered the following information: a. A building for the car wash is available under a five-year lease for $5,300 per month. b. The car wash equipment costs $400,000 and could be sold in five years for 10% of its original cost. c. The car wash requires a working capital investment of $9,000 for cleaning supplies, change funds, and so forth. After five years, this working capital would be released for investment elsewhere. d. Each customer would pay $1.25 for a wash and $0.55 for access to a vacuum cleaner. e. The only variable costs are 7.5 cents per wash (for water) and 10 cents per use of the vacuum. f. Additional monthly operating costs include cleaning, $3,800; insurance, $75; and maintenance, $1,895. g. Gross receipts from the wash would be $4,000 per week and 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 13% return. Click here to view Exhibit 14B-1 and Exhibit 14B-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 inflows from its operation. 2-a. What is the net present value of the investment in the car wash? 2-b. Should Mr. Duncan open the car wash? Complete this question by entering your answers in the tabs below. Required 1 Required 2A Required 2B Assuming that the car wash will be open 52 weeks a year, compute the expected annual net cash inflows from its operation. Auto wash cash receipts Vacuum cash receipts Total cash receipts Less cash disbursements Water Electricity Rent Cleaning Insurance Maintenance Total cash disbursements 0 0
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