Case 30 : Net Present Value Analysis (Case)

Calculate:

CCA = 30%

Tax Rate = 20%

Strategic Decision-making

Your report must consider all of the following issues

• Net present values[NPV]

• Internal Rate of Return
• Strategic Planning
• Capital Budgeting
• Qualitative versus quantitative issues
• Presentation and use of language

Required:

• Introduction
• Problem outline and discussion
• Assumptions/Standards
• Problem Analysis: Financial Analysis and Non-financial strategic considerations (very important)
• Clear and unambiguous recommendations
• Conclusions (very important)

In five 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 a five-year lease at a cost of $1,700 per month. Purchase and installation costs of equipment would total $175,000. In five 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 clean- ing 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 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 main- tenance, $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.