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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 building in which an auto wash could be installed is available under a five-year lease at a cost of $3,700 per month a. 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 b. 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, c. 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. d. 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. e. In addition to rent, monthly costs of operation would be: cleaning, $1,200; insurance, $1,000; and maintenance, $2,000. f. 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 (675 * 60%) per week g. Mr. Duncan will not open the car wash unless it provides at least a 10% return. Required: 1. 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! The expected net annual cash receipts will be: Car wash cash receipts Vacuum cash receipts Total cash receipts Less cash disbursements: Washer (ie. water) Electricity Rent Cleaning Insurance Maintenance Total cash disbursements Net annual cash receipts Cculate the simple formula Calculate the simple rate of return using the following formula a. 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? 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! C. Now(0) Year1 Year 2 Year 3 Year 4 Year Item Initial Investment (ie. equipment cost) Working capital needed Net annual cash receipts Salvage value of equipment Working capital released Net annual cash flows