Florida Car Wash is considering a new project, which requires an initial investm
ID: 2726319 • 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%. Calculate without using Excel and use the following chart.
What is the project’s NPV? Should you accept the project based on its NPV?
What is the project’s IRR? 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?
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
Yes, based on NPV, project should be accepted.
Year 0 1 2 3 Cost of new machine 60,000 Working capital 16,333 Change in working capital 817 857 Revenues 70,000 73,500 77,175 Variable costs 14,000 14,700 15,435 Fixed costs 10,000 10,000 10,000 Depreciation 20,000 20,000 20,000 Gain on sale of equipment 10,000 Pretax profit 26,000 28,800 41,740 Taxes 9,100 10,080 12,609 Profit 16,900 18,720 29,131 Cash flows ( 76,333) 36,083 37,863 49,131 Discounted cash flows at 9% discount rate (76,333) 33,103 31,869 37,939 Net present value 26,578Related Questions
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