Problem 10-2 Performing an NPV Analysis (LO2 - CC8) In eight years, Kent Duncan
ID: 2554556 • Letter: P
Question
Problem 10-2 Performing an NPV Analysis (LO2 - CC8) In eight years, Kent Duncan will retire. He has $230,000 to invest, and 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, Kent has determined the following a. A building, in which a car wash could be installed, is available under an eight-year lease at a cost of b. Purchase and installation costs of equipment would total $230,000. In eight years, the equipment could c. An investment of an additional $5,000 would be required to cover working capital needs for cleaning $2,100 per month. be sold for about 10% of its original cost. supplies, change funds, and so forth. After eight years, this working capital would be released for d. Both a car wash and a vacuum service would be offered, with a wash costing $3 and the vacuum e. The only variable costs associated with the operation would be 36 cents per wash for water and 40 f. In addition to rent, monthly costs of operation would be as follows: cleaning, $560; insurance, $80; g. Gross receipts from the car wash would be about $1,950 per week. According to the experience of other h. Kent will not open the car wash unless it provides at least a 10% return, since this is the amount that investment elsewhere costing 60 cents per use cents per use of the vacuum for electricity maintenance, $790 car washes, 70% of the customers using the wash would also use the vacuum could be earned by simply placing the $230,000 in high-grade securities Click here to view Exhibit 10-1 and Exhibit 10-2, 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 net annual cash receipts (gross cash receipts less cash disbursenm equipment, the working capital, or the salvage value in these computations.) . (Do not include the cost of the Net annual cash receiptsExplanation / Answer
Answer 1. Calculation of Net Annual Cash Flow Average Weekly use of Car Wash and Vaccums: Gross Per Use Uses Car Wash 1,950.00 3.00 650.00 Vacuums 273.00 0.60 455.00 Expected net annual cash flow from Car Wash = 650 Nos X 52 weeks X $3 101,400.00 Vacuums = 455 Nos X 52 Weeks X $0.60 14,196.00 Total Cash Receipts 115,596.00 Less: Cash Disbursements Variable Cost: Car Wash = 650 Nos X 52 weeks X $0.36 12,168.00 Vacuums = 455 Nos X 52 Weeks X $0.4 9,464.00 21,632.00 Fixed Cost: Building Leases - $2100 X 12 25,200.00 Cleaning - $560 X 12 6,720.00 Insurance - $80 X 12 960.00 Maintenace - $790 X 12 9,480.00 42,360.00 Total Cash Disbursement 63,992.00 Annual Net Cash Flow from operation 51,604.00 Calculation of NPV Particulars Year 10% Factor Net Cash Flow Present value A B C C X D Cash Inflow Annual Net Cash Inflow 1-8 5.335 51,604.00 275,307 Salvage Value of Equipment 8 0.467 23,000.00 10,741 Release of Working Capital 8 0.467 5,000.00 2,333 A. Total Cash Inflow - PV 288,381 Cash Outflow Cost of Equipment 0 1.00 230,000.00 230,000 Working Capital Requirement 0 1.00 5,000.00 5,000 B. Total Cash Outflow - PV 235,000 NPV (A - B) 53,381 Mr. Duncan should open the Workshop (NPV is Postive)
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.