Kent Duncan, a sixty-four-year-old engineer, will be retiring at the end of the year. He is exploring the possibility of opening a self-service car wash. The car wash could be managed for three years (2023, 2024 and 2025), and it could be closed easily after operating it for three years. After careful study, Mr. Duncan has determined the following:

1. A building in which a car wash could be installed is available under a three-year lease at a cost of R71 000 per annum.

2. Purchase and installation costs of equipment required to run the car wash would amount to R450 000. In three years, the equipment could be sold for about 10% of its original cost.

3. An investment of an additional R20 000 would be required to cover working capital needs for cleaning supplies, change funds, and so forth. After three years, this working capital would be released for investment elsewhere.

4. The car wash business will offer both a wash and a vacuum service for R50 and R25 per service respectively. The only variable costs associated with the operation would be R20 per wash for water and R10 per use of the vacuum for electricity. In addition to rent of the building, annual costs of operation would be cleaning of R14 500 and insurance of R7 500.

5. Gross receipts from the wash would be about R8 500 per week. According to the experience of other car washes, 40% 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 15% return. The car wash will be open 52 weeks a year. All services would be rendered for cash and all supplies would be paid on presentation of invoices (i.e. Mr Duncan will not sell or buy anything on credit). Mr. Duncan would like to approach the bank for a loan of R500 000 to assist in the opening of this car wash. The bank will charge interest rate of 12% per annum.

(a) Discuss the strategic considerations relating to the decision to enter the car wash market

(b) Prepare a capital budget report in which you advise Mr. Duncan as to open the car wash or not? Show computations using the net present value method, profitability index, payback method and internal rate of return of investment analysis. Round off your figures to the nearest Rand.

(c) If you were the bank manager, list five questions that you will ask Mr. Duncan before you approve his loan.