Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Critical Thinking Problem - determine Simple Rate of Return, Payback Method, Net Present Value, Internal Rate of Return, and Decision Making (25 points). In five

image text in transcribedimage text in transcribedimage text in transcribedimage text in transcribed Critical Thinking Problem - determine Simple Rate of Return, Payback Method, Net Present Value, Internal Rate of Return, and Decision Making (25 points). 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. A building in which an auto wash could be installed is available under a five-year lease at a cost of $3,700 per month. b. Purchase and installation costs of equipment would total $200,000. In five years, the equipment could be sold for about 10% of its original cost. Depreciation in done using the straight-line method over its useful life. c. An investment of an additional $3,000 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. d. Both a car wash and a vacuum service would be offered with a wash costing $4.00 and a vacuum costing $1.25 per use. e. The only variable costs associated with the operation would be $0.50 per wash for water and $0.25 per use of the vacuum for electricity. f. In addition to rent, monthly costs of operation would be: cleaning, $1,200; insurance, $1,000; and maintenance, \$2,000. g. Gross receipts from the car wash would be $3,206.25 per week. This would be 675 car washes per week. According to the experience of other car washes, 60% of the customers using the wash would also use the vacuum. There would be 405 vacuum uses (67560%) per week Assuming that the car wash will be open 52 weeks a year, compute the expected net annual cash receipts (gross cash receipts less cash disbursement) from its operation. Do not include the cost of the equipment, the working capital, or the salvage value in this part of your computations. Use the template below! a. Calculate the simple rate of return using the following formula: Annual rate of return = Annual incremental NOI/Initial Investment (Hint: In this problem Annual incremental NOI will equal Net Annual Cash Receipts minus Depreciation) Would the car wash be purchased using the 10% required rate of return? b. Calculate the payback period using the following formula: Payback period = Investment required/Net Annual Cash Receipts Kent Duncan hopes to recover his initial investment within three years. Would he accept this investment using these criteria? c. Compute the net present value using the required rate of return of 10% and set your problem up using the following template and use the NPV formula below! d. Approximate the internal rate of return using the following formula: 2. Would you advise Kent Duncan to open the car wash using all of the above capital budgeting evaluations methods at the 10% required rate of return

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Intermediate Accounting 2007 FASB Update Volume 2

Authors: Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield

12th Edition

0470128763, 978-0470128763

More Books

Students also viewed these Accounting questions

Question

Define induction and what are its objectives ?

Answered: 1 week ago

Question

Discuss the techniques of job analysis.

Answered: 1 week ago

Question

How do we do subnetting in IPv6?Explain with a suitable example.

Answered: 1 week ago

Question

Explain the guideline for job description.

Answered: 1 week ago

Question

What is job description ? State the uses of job description.

Answered: 1 week ago