n eight years, Kent Duncan will retire. He has $320,000 to invest, and 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, Kent has determined the following: A building, in which a car wash could be installed, is available under an eight-year lease at a cost of $3,000 per month. Purchase and installation costs of equipment would total $320,000. In eight years, the equipment could be sold for about 10% of its original cost. An investment of an additional $5,000 would be required to cover working capital needs for cleaning supplies, change funds, and so forth. After eight years, this working capital would be released for investment elsewhere. Both a car wash and a vacuum service would be offered, with a wash costing $3 and the vacuum costing 80 cents per use. The only variable costs associated with the operation would be 34 cents per wash for water and 40 cents per use of the vacuum for electricity. In addition to rent, monthly costs of operation would be as follows: cleaning, $740; insurance, $170; maintenance, $1,060. Gross receipts from the car wash would be about $3,300 per week. According to the experience of other car washes, 70% of the customers using the wash would also use the vacuum. Kent will not open the car wash unless it provides at least a 10% return, since this is the amount that could be earned by simply placing the $320,000 in high-grade securities. Click here to view Exhibit 10-1 and Exhibit 10-2, to determine the appropriate discount factor(s) using tables. 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 disbursements) from its operation. (Do not include the cost of the equipment, the working capital, or the salvage value in these computations.) 2-a. Compute the NPV using the method of investment analysis. (Round discount factor(s) to 3 decimal places. Round other intermediate calculations and final answer to the nearest whole dollar amount.) 2-b. Would you advise Kent to open the car wash? multiple choice Yes Correct No Explanation 1. Average weekly use of the auto wash and the vacuum will be: Auto wash: $3,300 = 1,100 uses $3 Vacuum: 1,100 70% = 770 uses The expected net annual cash receipts will be: Auto wash cash receipts ($3,300 52) $ 171,600 Vacuum cash receipts (770 $0.80 52) 32,032 Total cash receipts $ 203,632 Deduct: Cash disbursements: Water (1,100 $0.34 52) $ 19,448 Electricity (770 $0.40 52) 16,016 Rent ($3,000 12) 36,000 Cleaning ($740 12) 8,880 Insurance ($170 12) 2,040 Maintenance ($1,060 12) 12,720 Total cash disbursements 95,104 Net annual cash receipts $ 108,528 2-a. Item Year(s) Amount of Cash Flows 10% Factor Present Value of Cash Flows Cost of equipment Now $ (320,000 ) 1.000 $ (320,000 ) Working capital needed Now (5,000 ) 1.000 (5,000 ) Net annual cash receipts (above) 1-8 108,528 5.335 578,997 Salvage of equipment 8 32,000 0.467 14,944 Working capital released 8 5,000 0.467 2,335 Net present value $ 271,276 2-b. Yes, Mr. Duncan should open the auto wash. It promises more than a 10% rate of return