Question 36: In five years, Kent Duncan will retire. He is exploring the possibi

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Question 36: 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 $3,400 per month.

Purchase and installation costs of equipment would total $315,000. In five years the equipment could be sold for about 10% of its original cost.

An investment of an additional $2,000 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.

Both a wash and a vacuum service would be offered with a wash costing $1.54 and the vacuum costing $.85 per use.

The only variable costs associated with the operation would be 8 cents per wash for water and 10 cents per use of the vacuum for electricity.

   

   

Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.

    

Assuming that the car wash will be open 52 weeks a year, compute the expected annual net cash receipts from its operation.

          

Determine the net present value using the net present value method of investment analysis. (Any cash outflows should be indicated by a minus sign. Use the appropriate table to determine the discount factor(s).)

           

Question 36: 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:

Explanation / Answer

1.

Workings:

2-a:

2-b:

Not advised to open the car wash, as NPV is negative

Particulars Amount Amount Auto wash cash receipts        1,04,104 [67600*1.54] Vacuum cash receipts            34,476 Total cash receipts        1,38,580 Less Cash disbursements Water            5,408 [124800*0.08] Electricity            4,056 [74880*0.1] Rent          40,800 3400*12 Cleaning          22,800 1900*12 Insurance                900 75*12 Maintenance          20,100 1675*12 Total cash disbursements            94,064 Annual net cash flow from operations            44,516

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