Florida Car Wash is considering a new project, which requires an initial investm

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?

b. Should you accept the project based on its NPV? What is the project’s IRR?

c. Will your answer change based on the IRR method? How much would the project’s NPV change if the number of cars washed reduces to half?

Explanation / Answer

-95331.25 units selling price revenue variable cost contribution fixed cost EBIT depreciation profit after dep tax 35% profit after tax dep profit after tax before depreciation present value@9% present value of cash inflow investment in workig capital cost of machine 60000 Year 1 2800 25 70000 14000 56000 10000 46000 16666.67 29333.33 10266.67 19066.67 16666.67 35733.33 0.917431 32782.87462 bill receivables present value @9% 2 2800 26.25 73500 14700 58800 10000 48800 16666.67 32133.33 11246.67 20886.67 16666.67 37553.33 0.84168 31607.88935 Year 1 5833.333 0.917431 5351.681957 3 2800 27.5625 77175 15435 61740 10000 51740 16666.67 35073.33 12275.67 22797.67 16666.67 39464.33 0.772183 30473.70625 year 2 6125 0.84168 5155.289959 sale proceed from scrap value after capital gain tax 9999.85 0.772183 7721.718973 year 3 6431.25 0.772183 4966.105006 investment in working capital 35331.25 0.772183 27282.21055 inventory 129868.3997 Year 1 11025 0.917431 10114.6789 cash outflow 95331.25384 Year 2 11576.25 0.84168 9743.498022 NPV 34537.14589 IRR 12.57% investment in working capital 35331.25384 yes project would be accepted as NPV is positive no answer would not change as IRR is greater than minimum required rate of returnn of 9% depreciation cost of machine 60000 10000 50000 16666.67 depreciation tax 35% -95331.25 cash outflow sales 1400 25 35000 7000 28000 10000 18000 16666.67 1333.333 466.6667 866.6667 16666.67 17533.33 0.917431 16085.62691 cost of machine 60000 1400 26.25 36750 7350 29400 10000 19400 16666.67 2733.333 956.6667 1776.667 16666.67 18443.33 0.84168 15523.38468 investment of working capital 35331.25 1400 27.5625 38587.5 7717.5 30870 10000 20870 16666.67 4203.333 1471.167 2732.167 16666.67 19398.83 0.772183 14979.45863 total cash outflow 95331.25 sale proceed from scrap value after capital gain tax 9999.85 0.772183 7721.718973 investment in working capital 0 0.772183 0 54310.18919 cash outflow 95331.25384 NPV -41021.0647 Npv would be reduced -6483.91876

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