Question

lorida Car Wash is considering a new project whose data are shown below. The equipment to be used has a 3-year tax life. Under the new tax law, the equipment is eligible for 100% bonus depreciation, so it will be fully depreciated at t = 0. At the end of the project's 3-year life, it would have zero salvage value. No change in net operating working capital (NOWC) would be required for the project. Revenues and operating costs will be constant over the project'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 change? (Hint: Note that cash flows are constant at the Year 1 level, whatever that level is.) Do not round the intermediate calculations and round the final answer to the nearest whole number.

WACC	10.0%
Equipment cost	$60,000
Number of cars washed	2,960
Average price per car	$25.00
Fixed op. cost	$10,000
Variable op. cost/unit (i.e., VC per car washed)	$5.375
Tax rate	25.0%

a. –$33,804

b. –$36,433

c. –$46,199

d. –$28,170

e. –$43,339

Answer 1