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A building in which a car wash could be installed is available under a five-year lease at a cost of $5,600 per month. Purchase and
- A building in which a car wash could be installed is available under a five-year lease at a cost of $5,600 per month.
- Purchase and installation costs of equipment would total $240,000. In five years the equipment could be sold for about 10% of its original cost.
- An investment of an additional $4,000 would be required to cover working capital needs for cleaning supplies, change funds, and so forth. After five years, this working capital would be released for investment elsewhere.
- Both a wash and a vacuum service would be offered. Each customer would pay $1.12 for a wash and $.55 for access to a vacuum cleaner.
- The only variable costs associated with the operation would be 7.5 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, $4,900; insurance, $125; and maintenance, $1,825.
- Gross receipts from the wash would be about $3,472 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 12% return.
Click here to viewExhibit 13B-1andExhibit 13B-2, to determine the 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 its operation.
2-a. Determine the net present value using the net present value method of investment analysis.
2-b. Would you advise Mr. Duncan to open the car wash?
I am having trouble finding 2-a
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