Florida Car Wash is considering a new project, which requires an initial investm
ID: 2723840 • 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?
Explanation / Answer
Solution:
To arrive at the NPV :
The IRR of the project will be the one when the NPV becomes zero
The NPV would be when the number of car washed is half :
The NPV is negative
Particulars & formula 0 1 2 3 Initial investment -60000 Car washed 2800 2800 2800 Sales unit price 25 26.25 27.5625 Total sale( car washed * price) 70000 73500 77175 Variable cost 20% of revenue 14000 14700 15435 Gross profit 56000 58800 61740 Fixed cost 10000 10000 10000 Depreciation staright line 60000//3 20000 20000 20000 EBIT 26000 28800 31740 Tax at 35% 9100 10080 11109 Profit after tax 16900 18720 20631 Salvage value 10000 Cash flow = profit + depreciation -60000 36900 38720 50631Related Questions
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