In eight years, Kent Duncan will retire. He is exploring thepossibility of opening a self-service car wash. The car wash couldbe managed in the free time he has available from his regularoccupation, and it could be closed easily when he retires. Aftercareful study, Mr. Duncan has determined the following:
A building in which a car wash could be installed is availableunder an eight-year lease at a cost of $1,700 per month.
Purchase and installation costs of equipment would total $200,000.In eight years the equipment could be sold for about 10% of itsoriginal cost.
An investment of an additional $2,000 would be required to coverworking capital needs for cleaning supplies, change funds, and soforth. After. eight years, this working capital would be releasedfor investment elsewhere.
Both a wash and a vacuum service would be offered with a washcosting $2.00 and the vacuum costing $1.00 per use.
The only variable costs associated with the operation would be 20cents per wash for water and 10 cents per use of the vacuum forelectricity.
In addition to rent, monthly costs of operation would be: cleaning,$450; insurance, $75; and maintenance, $500.
Gross receipts from the wash would be about $1,350 per week.According to the experience of other car washes, 60% of thecustomers using the wash would also use the vacuum.
Mr. Duncan will not open the car wash unless it provides at least a10% return.
Assuming that the car wash will be open 52 weeks a year, computethe expected annual net cash
receipts (gross cash receipts less cash disbursements) from itsoperation. (Do not include the cost of the equipment, the workingcapital, or the salvage value in these computations.) (Ignoreincome taxes.)
Would you advise Mr. Duncan to open the car wash? Show computationsusing the net present value method of investment analysis. Roundall dollar figures to the nearest whole dollar. (Ignore incometaxes.)Â
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