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 building in which a car wash could be installed is available under a five-year lease at a cost of $3,300 per month. • Purchase and installation costs of equipment would total $126,000. In five years the equipment could be sold for about 10% of its original cost. • An investment of an additional $9,500 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. • Both a wash and a vacuum service would be offered with a wash costing $1.53 and the vacuum costing $0.85 per use. • 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, $1,100; insurance, $75; and maintenance, $1,645. • Gross receipts from the wash would be about $1,836 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 12% return. Required: 1. 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 Electricity Rent Cleaning Insurance Maintenance Total cash disbursements Annual net cash flow from operations $ 7,160 9,547 × 39,600 13,200 900 19,740 $ 95,472 48,694 144,166 $ 90,147 54,019 *Red text indicates no response was expected in a cell or a formula-based calculation is incorrect; no points deducted. 2-a. Determine the net present value using the net present value method of investment analysis. Note: Any cash outflows should be indicated by a minus sign. Round the final answers to the nearest whole dollar. Amount of Year(s) Cash Flows Present Value of Cash Flows Cost of the equipment Now $ (126,000) $ (126,000) Working capital Now $ (9,500) (9,500) Net annual cash inflows 1-5 $ 270,095 194,676 Working capital release 5 $ 9,500 5,390 X Salvage value 5 $ 12,600 7,150 Net present value $ 71,716 *Red text indicates no response was expected in a cell or a formula-based calculation is incorrect; no points deducted. 2-b. Would you advise Mr. Duncan to open the car wash? Yes ○ No

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 building in which a car wash could be installed is available under a five-year lease at a cost of $3,300 per month. • Purchase and installation costs of equipment would total $126,000. In five years the equipment could be sold for about 10% of its original cost. • An investment of an additional $9,500 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. • Both a wash and a vacuum service would be offered with a wash costing $1.53 and the vacuum costing $0.85 per use. • 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, $1,100; insurance, $75; and maintenance, $1,645. • Gross receipts from the wash would be about $1,836 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 12% return. Required: 1. 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 Electricity Rent Cleaning Insurance Maintenance Total cash disbursements Annual net cash flow from operations $ 7,160 9,547 × 39,600 13,200 900 19,740 $ 95,472 48,694 144,166 $ 90,147 54,019 Red text indicates no response was expected in a cell or a formula-based calculation is incorrect; no points deducted. 2-a. Determine the net present value using the net present value method of investment analysis. Note: Any cash outflows should be indicated by a minus sign. Round the final answers to the nearest whole dollar. Amount of Year(s) Cash Flows Present Value of Cash Flows Cost of the equipment Now $ (126,000) $ (126,000) Working capital Now $ (9,500) (9,500) Net annual cash inflows 1-5 $ 270,095 194,676 Working capital release 5 $ 9,500 5,390 X Salvage value 5 $ 12,600 7,150 Net present value $ 71,716 Red text indicates no response was expected in a cell or a formula-based calculation is incorrect; no points deducted. 2-b. Would you advise Mr. Duncan to open the car wash? Yes ○ No

Personal Finance

13th Edition

ISBN:9781337669214

Author:GARMAN

Publisher:GARMAN

Chapter13: Investment Fundamentals

Section: Chapter Questions

Problem 3FPC

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