Net Present Value Analysis
In eight years, Kent Duncan will retire. He is exploring the possibility of opening a self-service car wash. The car wash could be managed in the free time he has available from his regular occupation, and it could be closed easily when he retires. After careful study, Mr. Duncan has determined the following:
A building in which a car wash could be installed is available under an eight-year lease at a cost of $1,700 per month.
Purchase and installation costs of equipment would total $200,000. In eight years the equipment could be sold for about 10% of its original cost.
An investment of an additional $2,000 would be required to cover working capital needs for cleaning supplies, change funds, and so forth. After. eight years, this working capital would be released for investment elsewhere. Both a wash and a vacuum service would be offered with a wash costing $2.00 and the vacuum costing $1.00 per use. The only variable costs associated with the operation would be 20 cents per wash for water and 10 cents per use of the vacuum for electricity. In addition to rent, monthly costs of operation would be: cleaning, $450; insurance, $75; and maintenance, $500.
Gross receipts from the wash would be about $1,350 per week. According to the experience of other car washes, 60% of the customers using the wash would also use the vacuum.
Mr. Duncan will not open the car wash unless it provides at least a 10% return.
a. Assuming that the car wash will be open 52 weeks a year, compute the expected annual net cash receipts (gross cash receipts less cash disbursements) from its operation. (Do not include the cost of the equipment, the working capital, or the salvage value in these computations.) (Ignore income taxes.)
b. Would you advise Mr. Duncan to open the car wash? Show computations using the net present value method of investment analysis. Round all dollar figures to the nearest whole dollar. (Ignore income taxes.)