Florida Car Wash is considering a new project, which requires an initial investm
ID: 2725989 • Letter: F
Question
Florida Car Wash is considering a new project, which requires an initial investment of $60,000. The equipment to be used has a 3-year tax life, would be depreciated on a straight-line basis over its 3-year life to zero salvage value. The equipment can be sold for $10,000 at the end of year 3. With the new equipment, the company is expected to wash 2,800 cars per year for all 3 years. The price per car will be $25 for the first year, and growing at a constant rate of 5% due to inflation. . The variable cost is 20% of the revenue, and the fixed cost is $10,000 each year. Suppose Florida Car Wash allows its customers to pay their bills with an average 1-month delay, and its inventories are 15% of next year’s revenue. If the opportunity cost of capital is 9%, corporate tax rate is 35%, and capital gain tax is 15%.
a. What is the project’s NPV? Should you accept the project based on its NPV?
b. What is the project’s IRR? Will your answer change based on the IRR method?
c. How much would the project’s NPV change if the number of cars washed reduces to half?
Use the following chart.
Year 0
Year 1
Year 2
Year 3
Cost for new machine
Working Capital
Change in Working Capital
Revenues
Expense
Depre
Pretax Profit
Taxes
Profit
Net-of-tax Proceeds
Cash Flows
Discounted Cash Flows
Year 0
Year 1
Year 2
Year 3
Cost for new machine
Working Capital
Change in Working Capital
Revenues
Expense
Depre
Pretax Profit
Taxes
Profit
Net-of-tax Proceeds
Cash Flows
Discounted Cash Flows
Explanation / Answer
Year 0 1 2 3 Cost for new machine a $60,000.00 $0.00 $0.00 $0.00 Working Capital b - Note 1 $10,500.00 $525.00 $551.25 $0.00 Change in Working Capital c - Note 2 $0.00 $5,833.33 $291.67 $306.25 Revenues d $0.00 $70,000.00 $73,500.00 $77,175.00 Fixed Cost e $0.00 $10,000.00 $10,000.00 $10,000.00 Variable Cost f=d*20% $0.00 $14,000.00 $14,700.00 $15,435.00 Expense g=e+f $0.00 $24,000.00 $24,700.00 $25,435.00 Depre h=60000/3 $0.00 $20,000.00 $20,000.00 $20,000.00 Pretax Profit i=f-g-h $0.00 $26,000.00 $28,800.00 $31,740.00 Taxes j=i*35% $0.00 $9,100.00 $10,080.00 $11,109.00 Profit k=i-j $0.00 $16,900.00 $18,720.00 $20,631.00 Net-of-tax Proceeds l - Note 3 $0.00 $0.00 $0.00 $26,201.25 Cash Flows m=k+h-a-b-c -$70,500.00 $30,541.67 $37,877.08 $66,526.00 PV Factor at 9% n 1.0000 0.9174 0.8417 0.7722 Discounted Cash Flows o=m*n -$70,500.00 $28,019.88 $31,880.38 $51,370.28 NPV = $40,770.54 Note 1 - Working Capital Inventory - 15% of Next Year Sales Sales Working Capital Year Net Working Capital a b Year 1 $70,000.00 $10,500.00 Year 0 $10,500.00 Year 2 $73,500.00 $11,025.00 Year 1 $525.00 Year 3 $77,175.00 $11,576.25 Year 2 $551.25 Note 2 - Change in Working Capital Inventory - 15% of Next Year Sales Sales Monthly Sale Year Net Working Capital a b = a/12 Year 1 $70,000.00 $5,833.33 Year 1 $5,833.33 Year 2 $73,500.00 $6,125.00 Year 2 $291.67 Year 3 $77,175.00 $6,431.25 Year 3 $306.25 Note 3 - Net of Tax Proceeds Expected Sale Price of Machine $10,000 Less: Book Value of Machine $0 Capital Profit $10,000 Less: Tax on Above @ 15% $1,500 Net of Tax Proceeds $8,500 Reversal of Working Capital $17,701 Total Net of Tax Proceeds $26,201 Year 0 1 2 3 Cost for new machine a $60,000.00 $0.00 $0.00 $0.00 Working Capital b - Note 1 $5,250.00 $262.50 $275.63 $0.00 Change in Working Capital c - Note 2 $0.00 $2,916.67 $145.83 $153.13 Revenues d $0.00 $35,000.00 $36,750.00 $38,587.50 Fixed Cost e $0.00 $10,000.00 $10,000.00 $10,000.00 Variable Cost f=d*20% $0.00 $7,000.00 $7,350.00 $7,717.50 Expense g=e+f $0.00 $17,000.00 $17,350.00 $17,717.50 Depre h=60000/3 $0.00 $20,000.00 $20,000.00 $20,000.00 Pretax Profit i=f-g-h $0.00 -$2,000.00 -$600.00 $870.00 Taxes j=i*35% $0.00 -$700.00 -$210.00 $304.50 Profit k=i-j $0.00 -$1,300.00 -$390.00 $565.50 Net-of-tax Proceeds l - Note 3 $0.00 $0.00 $0.00 $17,350.63 Cash Flows m=k+h-a-b-c -$65,250.00 $15,520.83 $19,188.54 $37,763.00 PV Factor at 9% n 1.0000 0.9174 0.8417 0.7722 Discounted Cash Flows o=m*n -$65,250.00 $14,239.30 $16,150.61 $29,159.96 NPV = $-5700.13 Note 1 - Working Capital Inventory - 15% of Next Year Sales Sales Working Capital Year Net Working Capital a b Year 1 $35,000.00 $5,250.00 Year 0 $5,250.00 Year 2 $36,750.00 $5,512.50 Year 1 $262.50 Year 3 $38,587.50 $5,788.13 Year 2 $275.63 Note 2 - Change in Working Capital Inventory - 15% of Next Year Sales Sales Monthly Sale Year Net Working Capital a b = a/12 Year 1 $35,000.00 $2,916.67 Year 1 $2,916.67 Year 2 $36,750.00 $3,062.50 Year 2 $145.83 Year 3 $38,587.50 $3,215.63 Year 3 $153.13 Note 3 - Net of Tax Proceeds Expected Sale Price of Machine $10,000 Less: Book Value of Machine $0 Capital Profit $10,000 Less: Tax on Above @ 15% $1,500 Net of Tax Proceeds $8,500 Reversal of Working Capital $8,851 Total Net of Tax Proceeds $17,351
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.