Spot free car wash is considering a new project whose

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73. Spot-Free Car Wash is considering a new project whose data are shown below. The equipment to be used has a 3-yeartax life, would be depreciated on a straight-line basis over the project's 3-year life, and would have a zero salvage valueafter Year 3. No new working capital would be required. Revenues and other operating costs will be constant over theproject's life, and this is just one of the firm's many projects, so any losses on it can be used to offset profits in other units.If the number of cars washed declined by 40% from the expected level, by how much would the project's NPV decline?(Hint: Note that cash flows are constant at the Year 1 level, whatever that level is.)Project cost of capital (r)10.0%Net investment cost (depreciable basis)\$60,000Number of cars washed2,800Average price per car\$25.00Fixed op. cost (excl. deprec.)\$10,000Variable op. cost/unit (i.e., VC per car washed)\$5.375Annual depreciation\$20,000Tax rate35.0%a. \$28,939b. \$30,462c. \$32,066d. \$33,753e. \$35,530ANSWER:eRATIONALE:Base Case Calculationst = 0t = 1t = 2t = 3Investment costWACC: 10%\$60,000Cars washed2,8002,8002,8002,800Price per car\$25.00\$25.00\$25.00\$25.00Variable cost/unit\$5.375\$5.375\$5.375\$5.375Sales revenues\$70,000\$70,000\$70,000Fixed op. cost (excl. deprec.)\$10,00010,00010,00010,000Variable op costs\$5.37515,05015,05015,050DepreciationRate =33.333%20,00020,00020,000Operating income (EBIT)\$24,950\$24,950\$24,950TaxesRate = 35%8,7338,7338,733After-tax EBIT\$16,218\$16,218\$16,218+ Depreciation20,00020,00020,000Cash flow\$60,000\$36,218\$36,218\$36,218Base-Case NPV\$30,068Bad Case Calculationst = 0t = 1t = 2t = 3Investment cost\$60,000Cars washedDeclines by: 40%1,6801,6801,680Price per car\$25.00\$25.00\$25.00Variable cost/unit\$5.375\$5.375\$5.375Sales revenues\$42,000\$42,000\$42,000Page 56Downloaded by Fiber Infrastructure ([email protected])lOMoARcPSD|3225762
Ch 11 Cash Flow Estimation and Risk AnalysisFixed op. cost (excl. deprec.)10,00010,00010,000Variable op costs9,0309,0309,030Depreciation20,00020,00020,000Operating income (EBIT)\$ 2,970\$ 2,970\$ 2,970Taxes1,0401,0401,040After-tax EBIT\$1,931\$1,931\$1,931+ Depreciation20,00020,00020,000Cash flow\$60,000\$21,931\$21,931\$21,931Bad-Case NPV\$5,462Decline in NPV\$35,530POINTS:1DIFFICULTY:Difficulty: ChallengingQUESTION TYPE:Multiple ChoiceHAS VARIABLES:FalseLEARNING OBJECTIVES:FMTP.EHRH.17.11.05 - LO: 11-5NATIONAL STANDARDS:United States - BUSPROG: AnalyticSTATE STANDARDS:United States - AK - DISC: Capital budgeting and cost - DISC: Capital budgeting and cost ofcapitalUnited States - AK - Tier 2: Financial statements, an - Tier 2: Financial statements, analysis,forecasting, and cash flowsLOCAL STANDARDS:United States - OH - Default City - TBATOPICS:Sensitivity analysisKEYWORDS:Bloom’s: AnalysisOTHER:TYPE: Multiple Choice: ProblemDATE CREATED:8/26/2015 10:46 AMDATE MODIFIED:8/28/2015 1:04 PMQUESTION ID:JFND-GO4G-EO4D-OCJ3QUESTION GLOBAL ID:GCID-E7BW-1TBP-CTOU-GAMN-8R3U-YPB3-GE31-4QBU-GBTN-4C5G-CE4N-4CTI-8Y41-4CDD-GJOU-QQJT-GTDI-GWN8-EPRW-EMMN-CWHU-QPDF-GEHD-GCBS-GOSU-1QDN-CESU-13TS-GOSS-NA5N-8RSU-Y3BA-GBTD-GQMN-E7JI-YT4D-JFNN-4OTI-GO4W-NQNBEE

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