please help me. thank you! Florida Car Wash is considering a new project whose d
ID: 2766907 • Letter: P
Question
please help me. thank you!
Florida Car Wash is considering a new project whose data are shown below. The equipment to be used has a 3-year tax life, would be depreciated on a straight-line basis over the project's 3-year life, and would have a zero salvage value after Year 3. No new working capital would be required. Revenues and other operating costs will be constant over the project's life, and this is just one of the firm's many projects, so any losses on it can be used to offset profits in other units. If the number of cars washed declined by 40% from the expected level, by how much would the project's NPV decline? $28,939 $30,462 $32,066 $33,753 $35,530Explanation / Answer
Expected Level
After Decline
Sales
$70,000.00
$42,000.00
(Number of Units x $25)
Less: Variable Cost
$15,050.00
$9,030.00
(Number of Units x $5.375)
Less: Fixed Cost
$10,000.00
$10,000.00
Given
Less: Annual Depreciation
$20,000.00
$20,000.00
Given
EBT
$24,950.00
$2,970.00
Less: Tax @ 35%
$8,732.50
$1,039.50
(35% of EBT)
Net Income
$16,217.50
$1,930.50
Add: Depreciation
$20,000.00
$20,000.00
Given
Net OCF
$36,217.50
$21,930.50
NPV at expected level = -$60,000 + [($36,217.5)/(1+0.10)] + [($36,217.5)/(1+0.10)2] + [($36,217.5)/(1+0.10)3] =$30,067.56
NPV after decline = -$60,000 + [($21,930.5)/(1+0.10)] + [($21,930.5)/(1+0.10)2] + [($21,930.5)/(1+0.10)3] = -$5,462.09
Total Decline = $30,067.56 – (-$5,462.09) = $35,529.65
So, option 5 is correct
Expected Level
After Decline
Sales
$70,000.00
$42,000.00
(Number of Units x $25)
Less: Variable Cost
$15,050.00
$9,030.00
(Number of Units x $5.375)
Less: Fixed Cost
$10,000.00
$10,000.00
Given
Less: Annual Depreciation
$20,000.00
$20,000.00
Given
EBT
$24,950.00
$2,970.00
Less: Tax @ 35%
$8,732.50
$1,039.50
(35% of EBT)
Net Income
$16,217.50
$1,930.50
Add: Depreciation
$20,000.00
$20,000.00
Given
Net OCF
$36,217.50
$21,930.50
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