In five years, Kent Duncan will retire. He is exploring thepossibility of opening a self-service car wash. The car wash couldbe managed in the free time he has available from his regularoccupation, and it could be closed easily when he retires. Aftercareful study, Mr. Duncan determined the following:
A building in which a car wash could be installed is availableunder a five-year lease at a cost of $5,300 per month.
Purchase and installation costs of equipment would total$400,000. In five years the equipment could be sold for about 10%of its original cost.
An investment of an additional $9,000 would be required to coverworking capital needs for cleaning supplies, change funds, and soforth. After five years, this working capital would be released forinvestment elsewhere.
Both a wash and a vacuum service would be offered. Each customerwould pay $1.25 for a wash and $.55 for access to a vacuumcleaner.
The only variable costs associated with the operation would be7.5 cents per wash for water and 10 cents per use of the vacuum forelectricity.
In addition to rent, monthly costs of operation would be:cleaning, $3,800; insurance, $75; and maintenance, $1,895.
Gross receipts from the wash would be about $4,000 per week.According to the experience of other car washes, 60% of thecustomers using the wash would also use the vacuum.
Mr. Duncan will not open the car wash unless it provides atleast a 13% return.
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determinethe appropriate discount factor(s) using tables.
Required:
1. Assuming that the car wash will be open 52 weeks a year,compute the expected annual net cash receipts from itsoperation.
2-a. Determine the net present value using the net present valuemethod of investment analysis.
2-b. Would you advise Mr. Duncan to open the car wash?
