Florida Car Wash is considering a new project, which requires an initial investm
ID: 2725044 • 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%.
Year 0
Year 1
Year 2
Year 3
Cost for new machine
Working Capital
Change in Working Capital
Revenues
Expense
Depre
Pretax Profit
Taxes
Profit
Net-of-tax Proceeds
Cash Flows
Discounted Cash Flows
Year 0
Year 1
Year 2
Year 3
Cost for new machine
Working Capital
Change in Working Capital
Revenues
Expense
Depre
Pretax Profit
Taxes
Profit
Net-of-tax Proceeds
Cash Flows
Discounted Cash Flows
Explanation / Answer
Year 0 Year 1 Year 2 Year 3 Cost for new machine -$60,000 Working Capital Change in Working Capital -$9,538.33 Revenues (calculated below) $70,000 $73,500 $77,175 Less:Expense $24,000 $24,700 $25,435 Less: Depreciation = $60,000/3 $20,000 $20,000 $20,000 Pretax Profit $26,000 $28,800 $31,740 Less:Taxes @ 35% $9,100 $10,080 $11,109 Profit $16,900 $18,720 $20,631 Net-of-tax Proceeds (10000* (1-(15% +35%) $5,000 Cash Flows -$64,538.33 $36,900 $38,720 $55,169.33 NPV Discounted Cash Flows @ 9% -$64,538.33 $33,853.21 $32,589.85 $42,600.85 $44,505.57 Revenue year 1 year 2 year3 Cars per year 2800 2800 2800 Cost per wash ($25 for the first year, and growing at a constant rate of 5% due to inflation) $25 $26.25 $27.56 Total Revenue $70,000 $73,500 $77,175 Expenses Variable cost (20% of Revenue) $14,000 $14,700 $15,435 Add: Fixed Cost $10,000 $10,000 $10,000 Total Expenses $24,000 $24,700 $25,435 Working Capital Accounts Receivables average 1-month delay = $70000/12 $5,833.33 Add: Inventories 15% of next year revenue $3,705 Total change in working capital $9,538.33 Cash Flows for year 1 and 2 = Profit after tax + Depreciation Cash Flows for year 3 = Profit after tax + Depreciation + sale of assets + working capital recovered
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.