C | eto.rhedeation.com.hm.tpx Problem 13-27 Net Present Value Analysis [LO13-2]

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C | eto.rhedeation.com.hm.tpx Problem 13-27 Net Present Value Analysis [LO13-2] In five years, Kent Duncan wil retire. He is exploring the possiblity of opaning a self-savice car wash. The car wash cculd be managed in the free time he has available from his regular occupation, and it could be closed easily when he retires. Ater careful study, Mr. Duncan has determined the following a. A bulding 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 S181 in five years the equipment could be sold for about 10% of its original cost. c: An nvestment of an additional $9,000 would be required to cover working capital needs for cleaning supplies, change funds, and so forth. Ater five years, this working capital would be released for d. Bcth a wash and a vacuum service would be offered with a wash costing $1.10 and the vacuum costing e. The only variable costs associated with the operation would be 7.5 cents per wash for water and 10 f In addition to rent, monthly costs of operation would be cleaning, $3,00, insurance, $75, and e. Gross receipts from the wash would be about $2,640 per week. According to the experience of other car investment elsewhere. $.65 per use cents per use of the vacuum for electricity maintenance, $1,785 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. Cack hare to wew Eahilat 13B-1 nd Extitt 138.2. to determine the appopriste dicount tectorto using tables Required: 1 Assuming that the car wash wll 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 Clearing Insurance Maintenance Total cash disbursements Annual net cash fow from operations

Explanation / Answer

NPV is negative car wash should not be opened.

Now 1 2 3 4 5 Purchase of equipment         (181,000) Working capital              (9,000) Annual net cash inflows          42,384          42,384          42,384          42,384          42,384 Working capital released            9,000 Salvage value          18,100 Total cash flows         (190,000)          42,384          42,384          42,384          42,384          69,484 Discount factor 1 0.901 0.812 0.732 0.659 0.594 Present value (190,000.00)    38,187.98    34,415.81    31,025.09    27,931.06    41,273.50 Net present value     (17,166.57)

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