Question

Florida Car Wash is considering a new project whose data are shown below. The equipment to be used has a 3-year tax life, would be depreciated on a straight-line basis over the project's 3-year life, and would have a zero salvage value after Year 3. No change in net operating working capital would be required. Revenues and other operating costs will be constant over the project's life, and this is just one of the firm's many projects, so any losses on it can be used to offset profits in other units. If the number of cars washed declined by 40% from the expected level, by how much would the project's NPV change? (Hint: Note that cash flows are constant at the Year 1 level, whatever that level is.) Do not round the intermediate calculations and round the final answer to the nearest whole number.

WACC	10.0%
Net investment cost (depreciable basis)	$60,000
Number of cars washed	2,640
Average price per car	$25.00
Fixed op. cost (excl. depr.)	$10,000
Variable op. cost/unit (i.e., VC per car washed)	$5.375
Annual depreciation	$20,000
Tax rate	35.0%

a. -$33,499

b. -$28,474

c. -$33,834

d. -$38,859

e. -$31,154

Answer 1

Present value Year 0 1 PVIF@10% 1.000 0.909 $0 $12,246 Cash flow $ $ (13,471) =-2640*40%* (25-5.375)*(1-35%) $ (13,471) $ (13,471) 2 3 0.826 0.751 -$11,133 $10,121 Change in NPV -$33,499

Hence the correct option is a.-$33,499

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