1. Using a contribution margin formatted income statement, forecast Crossroad's after-tax net income for each of the next ten years after the upgrade.

Crossroads Car Wash: When Family and Finances Collide

Company Background

Thirty years ago, Ron Christian and his wife, Eva, established Crossroads Car Wash Inc. on 20 acres of worthless land on the outskirts of El Paso, Texas. They would have never imagined the urban sprawl that now engulfed their business. For years, the Christians worked 12 hours a day, seven days a week to support their family, almost losing the business several times. All that changed when developers, lured by inexpensive land prices began to build large subdivisions all around Crossroads Car Wash. With each new subdivision, sales at Crossroads, the only local car wash, increased significantly allowing the Christians to hire their children who lacked other career prospects or the desire to advance their education after graduating from high school. They were each paid a modest salary with the expectation they would learn and eventually take over the day-to-day operation of the family business. Jessie, the oldest, was responsible for maintaining their aging equipment and Alma, his little sister, oversawmarketing despite not being qualified. After employing their children for nearly ten years, Ron and Eva realized their children lacked the desire and/or ability to take full responsibility for their given positions and the Christians' were not going to realize their dream of transitioning day-to-day operations of Crossroads to Jessie and Alma.

The Christians would never get rich, but Crossroads provided enough income to support their family and generated employment for their children and the disadvantaged in their community. Long ago, Ron and Eva decided to hire graduates from Hope Ministries, a local drug and alcohol rehabilitation program. While most stayed at Crossroads for only a year or two, a few graduates continued to work with the Christians for several years. Ron and Eva considered them family.

Ron and Eva, now in their late 50's began to envision a retirement where they would slow down. With only the cash remaining in the corporation's bank account after Ron's recent battle with cancer, Crossroads was their only hope for a comfortable retirement. For years, commercial real estate developers have been buying the land all around Crossroads to build fast food and quick service restaurants, convenience stores and even a dollar store, but no one expressed interest in Crossroads - until now.

While Eva was out of the office, a representative from a major big box retailer, Mega, approached Ron and offered to buy Crossroads. The offer included all 20 acres with the intention of tearing down the business in order to build a massive 180,000 square foot hypermarket to sell groceries and general merchandise. While Ron was excited to share the good news with Eva, he decided to wait and discuss the offer with her in person at home.

Sharing the Good News

After another long day, Ron was again stuck in traffic on his drive home. He couldn't help but contemplate what life would be like without Crossroads. When he finally got home, Ron started, "I had an interesting meeting today. A representative from Mega stopped by the office." With surprise in her voice Eva replied, "What did he want?" "Mega is interested in purchasing our land," Ron replied matter-of-factly. "I figured eventually somebody would want to buy us out, but I had no idea it would be Mega. What was their offer?" she asked. Ron wrote the offer amount on a scrap of paper and passed it to Eva, "They offered this much for all twenty acres." "Wow!! That is a lot of money. I remember when Raul sold his 5-acre tract; Burger Barn only paid him $250,000. Why are they offering so much?" Eva pondered. "Well, there is a catch. The reason they offered us so much more is because they are including Crossroads in their offer." "What will they do with Crossroads?" Eva asked not really wanting to know his reply. "Their plan is to tear down Crossroads and build a new Mega store." "So, if we sell to Mega, we won't have a car wash anymore. Right?" Eva questioned. "That's right, but we should be set for retirement. Isn't that great?"

"I don't know. What happens if we don't accept their offer?"

"From what I understand, they approached several businesses with comparable offers, but our location by far is their preferred location. Eva, this is our opportunity to retire comfortably. I doubt we will get this opportunity again. What do you think?"

"Ron, I agree with you, but what will happen to Jessie and Alma and the others who have been with us for so many years if we sell? We would not be able to support any of them going forward. I'm worried with their limited education, experience and ambition that they won't be able to find jobs with comparable pay and benefits."

"I am worried about them too. I'm also worried about us. What would we do in retirement? Are we ready for retirement? The car wash has been our lives for 20 years," Ron replied with concern in his voice. "Well, we only have a few days to decide before Mega moves on to other locations. Let's discuss with Maria, our accountant, first thing Monday morning."

"Sounds good. Let's get some sleep. Tomorrow will be another long day," Eva answered.

Meeting with the Accountant

"Hi Maria. Thanks for meeting with me on such short notice," Eva commented. "I'm sorry Ron can't be here. The main pump went down again late yesterday. Jessie couldn't be bothered, so Ron worked alone all night to get it fixed, just so we could open on time this morning. We can't afford to lose all of those sales."m "Eva, I completely understand. Tell me what is so urgent?" Passing Ron's scrap paper to Maria, Eva explained, "On Friday, Mega made us a great offer to buy Crossroads and all of our land. While we are excited about their offer, Ron and I are also very nervous. We are not sure if Mega's offer is what is best for us and we need your help to analyze our options." "That sounds like a great offer. Tell me more," said Maria.

A confident Eva continued, "Crossroads is profitable now and we fully expect our profitability to only increase in the future. We had planned to upgrade the equipment and run Crossroads for another 10 years before we sell out. If upgraded, our equipment would be more efficient and reliable, reducing our variable maintenance cost per car wash and Ron could spend more time with me and less time maintaining the equipment." "This is a tough decision," Maria replied. "On the other hand, if we don't accept their offer, Mega will move on to another location and we could be passing up a golden opportunity to retire. Please, we really need your input." "I would be happy to help. What financial information do you have?" Maria asked. Eva handed Maria a paper with handwritten figures, "Yes. While Ron was working last night, I put together forecast and financial data for the future."

"Thanks. I will have something for you tomorrow morning." "Thank you. Ron and I look forward to hearing your recommendation." Eva said as the meeting ended.

Forecast and Financial Data Group 2 Forecast Next 10 Years Current Car Washes (Year 0) 39,250 Annual Growth Car Washes 2.00% Current Revenue Per Car Wash $13.50 Annual Price Increase 0.00% Annual Variable Expense Growth 0.00% Variable Costs (Current) Utilities (Elec/Gas/Water) $0.78 Detergents/Chemicals 0.64 Maintenance Costs 0.47 Site Labor 1.24 Total Variable Costs $3.13 Fixed Costs (Current) Owners' Salary (Combined) $1.91 Daughter's Salary 1.72 Son's Salary 1.72 Insurance 0.42 Operating Costs 0.57 Advertising 0.62 Depreciation Total Fixed Costs $6.96 Total Cost Per Car Wash $10.09Balance Sheet Current Year 10 Cash $310,000 $1,648,007 Land 30,000 30,000 Building 65,000 65,000 Accumulated Depreciation- Building (65,000) (65,000) Equipment (Current) 500,000 750,000 Accumulated Depreciation- Equipment (500,000) (750,000) Total Assets $340.000 $1, 678,007 Current Liabilities $0 $0 Common Stock (Current) 75,000 75,000 Retained Earnings (Current) 265,000 1,603,007 Total Liabilities & Equity $340,000 $1, 678,007 * *Except cash no changes in working are expected.Investment! Tax Information Interest Rate Equipment Investment Useful Life (Years) Salvage 1Value Maintenance Cost Decrease Per Car 'Wash Mega's Offer (Current) Aer Tax Gain on Safe (Current) Projected Sale Price in 10 Years Aer Tax Gain on Safe (Aer 10 Years) Long Term Capital Gains Tax Rate Corporate Income Tax Rate 100% 95250000 10 $0 $0.30 $ LETSDOO $1.4?6.000 13215001000 $1.9?6.000 20.00% 21.00%