Question
In: Finance
John West’s Used Cars plc has always hired students from the local university to wash the...
John West’s Used Cars plc has always hired students from the
local university to wash the cars on the lot. John West is
considering the purchase of an automatic car wash that would be
used in place of the students. The following information has been
gathered by John West’s accountant to help him make a decision on
the purchase:
a) Payments to students for washing cars total R15 000 per year at
present.
b) The car wash would cost R21 000 installed, and it would have a
10-year useful life. John West uses straight-line depreciation on
all assets. The car wash would have a negligible salvage value in
10 years.
c) Annual out-of-pocket costs associated with the car wash would
be: wages of students to operate the wash, keep the soap bin full
and so forth, R6 300; utilities, R1 800; and insurance and
maintenance, R900.
d) John West now earns a return of 20% on the funds invested in his
inventory of used cars. He feels that he would have to earn an
equivalent rate on the car wash for the purchase to be
attractive.
Required
1 ) Determine the annual savings that would be realised in cash
operating costs if the car wash was purchased.
2) Calculate the simple rate of return promised by the car wash.
(Hint: Note that this is a cost reduction project.) Will John West
accept this project if he expects a 20% return?
3) Calculate the payback period on the car wash. John West (who has
a reputation for being something of a penny-pincher) will not
purchase any equipment unless it has a payback of four years or
less. Will he purchase the car wash equipment?
4) Calculate (to the nearest whole per cent) the internal rate of
return promised by the car wash. Based on this calculation, does it
appear that the simple rate of return would normally be an accurate
guide in investment decisions?
Solutions
Expert Solution
| 1) | Annual Savings | |||||||||||
| Cost at present | 15,000 | |||||||||||
| After installation of Car Wash | ||||||||||||
| Wages to students | 6300 | |||||||||||
| Utilities | 1,800 | |||||||||||
| Insurance & maintenance | 900 | |||||||||||
| Total annual cost | 9,000 | |||||||||||
| Savings in cash operating cost | 6,000 | |||||||||||
| 2) | Simple rate of return: | |||||||||||
| A | Investment | 21,000 | ||||||||||
| B | Depreciation Cost per year | 2,100 | (21000/10) | |||||||||
| C | Annual Savings in costs | 3,900 | (6000-2100) | |||||||||
| D=C/A | Simple rate of return: | 19% | ||||||||||
| Return is less than 20% | ||||||||||||
| Hence it will NOT be accepted | ||||||||||||
| 3) | Payback Period | |||||||||||
| A | Investment | 21,000 | ||||||||||
| B | Annual Cash Savings | 6,000 | ||||||||||
| C=A/B | Payback Period in years | 3.50 | ||||||||||
| Payback is Less than 4 years | ||||||||||||
| He will purchase the car wash equipment | ||||||||||||
| 4) | Internal Rate Of Return | |||||||||||
| Pv | Initial Investment | 21,000 | ||||||||||
| Pmt | Annual Cash Savings | 6,000 | (NOTE:Depreciation is not a cash expense) | |||||||||
| Nper | Number of years of savings | 10 | ||||||||||
| RATE | Internal Rate of Return | 26% | (Using RATE function of excel with Nper=10, Pmt=6000, Pv=-21000) | |||||||||
| Excel Command: RATE(10,6000,-21000) | ||||||||||||
| IRR should be accurate guide | ||||||||||||
| Simple return does not consider cash flow.It also does not consider time value of money | ||||||||||||
jeff jeffy answered 1 year agoRelated Solutions
John West plc used cars has always hired students from the local university to wash the...
John West plc used cars has always hired students from the local
university to wash the cars on the lot. John West is considering
the purchase of an automatic car wash that would be used in place
of the students. The following information has been gathered by
John West's accountant to help him make a decision on the
purchase:
a) Payments to students for washing cars total R15 000 per year
at present.
b) The car wash would cost R21...
University Car Wash built a deluxe car wash across the street from campus.
University Car Wash built a deluxe car wash across the street from campus. The new machines cost $ 270,000 including Installation. The company estimates that the equipment will have a residual value of $ 24,000. University Car Wash also estimates It will use the machine for six years or about 12.000 total hours, Actual use per year was as follows:
John, age 19, is a student at the local university. He has recently been diagnosed with...
John, age 19, is a student at the local university. He has
recently been diagnosed with chronic renal failure and is scheduled
for routine hemodialysis. Provide detailed information for each of
the following:
Appraise the possible accommodations (ADA) that he can
request.
Interpret the long term and short term complications of
dialysis
Appraise community resources that may be available for
John
University Car Wash built a deluxe car wash across the street from campus. The new machines...
University Car Wash built a deluxe car wash across the street
from campus. The new machines cost $240,000 including installation.
The company estimates that the equipment will have a residual value
of $30,000. University Car Wash also estimates it will use the
machine for six years or about 12,000 total hours. Actual use per
year was as follows: Year Hours Used 1 2,600 2 2,100 3 2,200 4
1,800 5 1,600 6 1,700 1. Prepare a depreciation schedule for six...
University Car Wash built a deluxe car wash across the street from campus. The new machines...
University Car Wash built a deluxe car wash across the street
from campus. The new machines cost $261,000 including installation.
The company estimates that the equipment will have a residual value
of $27,000. University Car Wash also estimates it will use the
machine for six years or about 12,000 total hours. Actual use per
year was as follows:
Year
Hours
Used
1
2,800
2
1,400
3
1,500
4
2,500
5
2,300
6
1,500
Required:
1. Prepare a depreciation schedule for...
University Car Wash built a deluxe car wash across the street from campus. The new machines...
University Car Wash built a deluxe car wash across the street
from campus. The new machines cost $264,000 including installation.
The company estimates that the equipment will have a residual value
of $25,500. University Car Wash also estimates it will use the
machine for six years or about 12,500 total hours. Actual use per
year was as follows: Year Hours Used 1 2,900 2 1,300 3 1,400 4
2,600 5 2,400 6 1,900
1. Prepare a depreciation schedule for six...
University Car Wash built a deluxe car wash across the street from campus. The new machines...
University Car Wash built a deluxe car wash across the street
from campus. The new machines cost $258,000 including installation.
The company estimates that the equipment will have a residual value
of $28,500. University Car Wash also estimates it will use the
machine for six years or about 12,500 total hours. Actual use per
year was as follows:
Year
Hours Used
1
2,700
2
1,500
3
1,600
4
2,400
5
2,200
6
2,100
1. Prepare a depreciation schedule for six...
University Car Wash built a deluxe car wash across the street from campus. The new machines...
University Car Wash built a deluxe car wash across the street
from campus. The new machines cost $255,000 including installation.
The company estimates that the equipment will have a residual value
of $22,500. University Car Wash also estimates it will use the
machine for six years or about 12,500 total hours. Actual use per
year was as follows:
Year
Hours Used
1
3,100
2
1,600
3
1,700
4
2,300
5
2,100
6
1,700
Problem 7-5A Part 1
Required:
1. Prepare...
University Car Wash built a deluxe car wash across the street from campus. The new machines...
University Car Wash built a deluxe car wash across the street
from campus. The new machines cost $234,000 including installation.
The company estimates that the equipment will have a residual value
of $27,000. University Car Wash also estimates it will use the
machine for six years or about 12,000 total hours. Actual use per
year was as follows:
Year
Hours Used
1
2,800
2
1,900
3
2,000
4
2,000
5
1,800
6
1,500
1. Prepare a depreciation schedule for six...
John has always had problems with maintaining his weight, and he is used to counting kilocalories...
John has always had problems with maintaining his weight, and he
is used to counting kilocalories and maintaining an active
lifestyle. He has noticed that recently his diet of 2,500
kilocalories is no longer good for him. He is steadily gaining
weight, and he has to go on a weight-loss diet from time to time to
stay in shape. John is now 53; he is 5 feet 9 inches tall and
weighs 168 pounds. He loves exercise. He bikes a...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- The Doak Company has projected the following quarterly sales amounts for the coming year: Q1 Q2...
- Public policy can be seen as the result of “complex negotiations” between contesting groups, while others...
- A saturated, aqueous solution of a salt having the formula, AX3, is prepared. The equilibrium that...
- What might be some disadvantages of acqui-hiring? As a manager, how would you draw up a...
- A monopolist faces 300 customers divided into 3 different groups: 1. High-Demand customers each have a...
- You have just been hired by FAB Corporation, the manufacturer of a revolutionary new garage door...
- You are given the following information: Stockholders' equity as reported on the firm’s balance sheet =...
ADVERTISEMENT