Frank Fancys Car Wash

Frank Fancy has $150,000 to invest. He is exploring the possibility of opening a self-service car wash. Fancy plans to operate the car wash for eight years. At the end of the eighth year Mr. Fancy will close the car wash, sell off his equipment, and retire to Florida. After careful study, Mr. Frank Fancy has determined the following:

(a) A building in which a car wash could be installed is available under an eight-year lease at a cost of

$1,700 per year.

(b) Purchase and installation costs of equipment would total $150,000. The equipment will have no

salvage value.

(c) 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 returned to

Mr. Frank Fancy for investment elsewhere.

(d) Both a car wash and a vacuum service would be offered with a wash costing $1.50 and the vacuum

costing 25 cents per use.

(e) The only variable cost associated with the operations would be 23 cents per wash for water and 10

cents per use of the vacuum for electricity.

(f) In addition to rent, annual costs of the operation would be: cleaning = $450, insurance = $75, and

maintenance = $500.

(g) Fancy estimates that 900 customers will use the car wash each week. According to the experience of

other car washes, 70% of the customers using the wash also use the vacuum.

(h) The income tax rate is 30% and is expected to remain at that level for the full eight years.

(i) The IRS classifies the car wash equipment in the 7-year property class. The MACRS tables are on

page 2 and are to be used for the calculation of depreciation expense.

The requirements follow on page 2

Fancys Car Wash

________________

Required:

Prepare a schedule of discounted cash flows associated for the proposed venture (similar to what we did in class on Monday).

Use Excel to calculate the following:

a. the payback period for the investment under both absolute cash flows and discounted cash flows.

b. The net present value of the investment using an interest rate of 12%.

c. The internal rate of return on this project.

The MACRS Depreciation tables are presented below

8 4.46% 6.55%

9 6.56%

10 6.55%

11 3.28%

The MACRS Depreciation tables are presented below

Year # MACRS Property Classes

3-Year Class 5-Year Class 7-Year Class 10-Year Class

1 33.33% 20.00% 14.29% 10.00%

2 44.45% 32.00% 24.49% 18.00%

3 14.81% 19.20% 17.49% 14.40%

4 7.41% 11.52% 12.49% 11.52%

5 11.52% 8.93% 9.22%

6 5.76% 8.92% 7.37%

7 8.93% 6.55%

8 4.46% 6.55%

9 6.56%

10 6.55%

11 3.28%