Question

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 determined the following: a. A building in which a car wash could be installed is available under a five-year lease at a cost of $4,200 per month b. Purchase and installation costs of equipment would total $310.000. In five years the equipment could be sold for about 10% of its original cost C. An investment of an additional $6,000 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. d. Both a wash and a vacuum service would be offered. Each customer would pay $1.30 for a wash and $75 for access to a vacuum cleaner e. 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 fa electricity f. In addition to rent, monthly costs of operation would be cleaning. $2,700, insurance, $175, and maintenance, $1,735. g. Gross receipts from the wash would be about $2,730 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 11% return Click here to view Exhibil 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables Required: 1. Assuming that the car wash will be open 52 weeks a year, compute the expected annual net cash receipts from its operation 2-a. Determine the net present value using the net present value method of investment analysis. 2-b. Would you advise Mr. Duncan to open the car wash? Answer is complete but not entirely correct. Complete this question by entering your answers in the tabs below.

solution to just question 2 (a) please with explanations. thanks

Answer 1

Answer is given for 1 also since it is needed to answer 2(a)

All working notes is also given

Salvage value is taken 10% of initial investment

Working note shweth.caning 1 Auto car wash receipts Vacuum cash receipts Total Cash receipts $141,960 ($2,730*52) $85,176 ($141,960*60%) $227,136 Cash wash Vacuum cleaning per unit Quantity $1.30 109,200 $0.75 113,568 Rate 7.5 cents per wash 7.5 cents 10 cents per vacuum clean 10 cents Quantity 109,200 113,568 Less: Cash disbursement Water Electricity Rent Cleaning Insurance Maintenance Total Cash disbursements Annual net cash from operations $8,190 $11,357 $50,400 $32,400 $2,100 $20,820 (0.075*109,200) (0.1*113,568) ($4,200*12) ($2,700*12) ($175*12) ($1,735*12) $125,267 $101,869 Initial investment Purchase cost Working capital Total Cost of Investment $310,000 $6,000 $316,000 2 a) Net present value Cash Inflow PV factor $101,869 $31,000 $6,000 3.7566 0.6153 0.6153 Annual cash inflow Salvage value Release of working capital Present Value of Cash inflows Lees : Initial investment Net present value Present value of Cash inflows $382,685 $19,075 $3,692 $405,453 $316,000 $89,453 2b) Yes open the car wash since NPV is positive