Question
1. The Awesome Automobile Corporation is contemplating the acquisition of an automatic car wash. The following information is relevant: The cost of the car wash
1. The Awesome Automobile Corporation is contemplating the acquisition of an automatic car wash. The following information is relevant:
The cost of the car wash is $195,000 | ||
The anticipated revenue from the car wash is $100,000 per year. | ||
The useful life of the car wash is 10 years. | ||
Annual operating costs are expected to be: | ||
Salaries | $25,000 |
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Utilities | 9,600 |
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Water usage | 4,400 |
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Supplies | 11,000 |
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Repairs/maintenance | 10,000 |
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The salvage value for the car wash is zero. The firm uses straight-line depreciation (annual depreciation equals $19,500). The companys cost of capital and hurdle rate are 10 percent. Ignore income taxes.
Required:
A. | Compute the net present value. (6 points) |
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B. | Compute internal rate of return (IRR). Should the project be accepted based on IRR? (6 points) | |
C. | Compute the payback period. (3 points)
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