(50 points) Florida Car Wash is considering a new project, which requires an ini
ID: 2726440 • Letter: #
Question
(50 points) 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%.
What is the project’s NPV? Should you accept the project based on its NPV? (20 pts)
What is the project’s IRR? Will your answer change based on the IRR method?
(10 pts)
How much would the project’s NPV change if the number of cars washed reduces to half? (20 pts)
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
Description/Year 0 1 2 3 Cost for new machine (A) 60000 Working Capital(B)=15% of next years revenue 10500 11025 11576.25 Change in Working Capital © 525 551.25 -11576.3 Revenues=2800*25*Inflation(D) 70000 73500 77175 Expense=20% of Revenue+FC(E) 24000 24700 25435 Depre=60000/3(F) 20000 20000 20000 Pretax Profit =D-E-F 26000 28800 31740 Taxes=0.35*(Pretax Profit) 9100 10080 11109 Profit (G) 16900 18720 20631 Net-of-tax Proceeds=Salvage Value-Capital Gain Tax @15%(H) 8500 Cash Flows =F+G+H-A-C -60000 36375 38168.75 60707.25 Discounted Cash Flows@9% -60000 33371.56 32125.87 46877.14 NPV 52374.57 NPV positive.So Accept Project Using Excel function IRR 37%
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