Question

In eight years, Kent Duncan will retire. He has $290,000 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:

1. A building, in which a car wash could be installed, is available under an eight-year lease at a cost of $2,700 per month.
2. Purchase and installation costs of equipment would total $290,000. In eight years, the equipment could be sold for about 10% of its original cost.
3. An investment of an additional $2,000 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.
4. Both a car wash and a vacuum service would be offered, with a wash costing $3 and the vacuum costing 50 cents per use.
5. The only variable costs associated with the operation would be 48 cents per wash for water and 10 cents per use of the vacuum for electricity.
6. In addition to rent, monthly costs of operation would be as follows: cleaning, $680; insurance, $140; maintenance, $970.
7. Gross receipts from the car wash would be about $2,850 per week. According to the experience of other car washes, 70% of the customers using the wash would also use the vacuum.
8. 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 $290,000 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.)

Answer 1

Computation of net annual cash receipts

Particulars	Amount ($)	Amount ($)
Auto car wash receipts ($3 X 49400 washes)		148200
Vacuum cleaning receipts ($0.50 X 34580 vacuum cleanings)		17290
Total cash receipts		165490
Less: Cash disbursements
Water ($0.48 X 49400 washes)	23712
Electricity ($0.10 X 34580 vacuum cleanings)	3458
Rent ($2700 X 12 months0	32400
Cleaning ($680 X 12 months)	8160
Insurance ($140 X 12 months)	1680
Maintenance ($970 X 12 months)	11640
Total cash disbursements		81050
Net annual cash receipts from operations		$84440

Working notes:
Number of car wash per week = ($2850 Gross receipts / $3 Per wash cost) = 950 washes per week
Number of car washes per annum = (950 washes X 52 weeks) = 49400 washes per annum
Number of vacuum cleaning per week = (70% of 950 weekly washes) = 665 vacuum cleaning
Number of vacuum cleaning per annum = (665 cleaning X 52 weeks) = 34580 vacuum cleaning

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