Spot-Free Car Wash Is Considering a New Project Whose Data

question 25

Multiple Choice

Spot-Free Car Wash is considering a new project whose data are shown below.The equipment to be used has a 3-year tax life, would be depreciated on a straight-line basis over the project's 3-year life, and would have a zero salvage value after Year 3.No new working capital would be required.Revenues and other 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 decline? (Hint: Note that cash flows are constant at the Year 1 level, whatever that level is.) $\begin{array}{lr}\text { Project cost of capital (r) } & 10.0 \% \\\text { Net investment cost (depreciable basis) } & \$ 60,000 \\\text { Number of cars washed } & 2,800 \\\text { Average price per car } & \$ 25.00\\\text { Fixed op. cost (excl. deprec) } & \$ 10,000 \\\text { Variable op. costiunit (i.e., VC per car washed) } & \$ 5.375 \\\text { Annual depreciation } & \$ 20,000 \\\text { Tax rate } & 25.0 \%\end{array}$

• A) $33,391
• B) $35,149
• C) $36,999
• D) $38,946
• E) $40,996

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Definitions:

Direct Pay

Compensation paid directly to employees for their work, including salaries, wages, and bonuses, not including indirect benefits like health insurance.

Indirect Pay

Refers to benefits or perks received by employees that are not part of their direct monetary compensation, such as health insurance, retirement plans, or paid time off.

Reward System

A system that recognizes and rewards employees for their contributions to the organization, often influencing their performance and motivation.

Compensation System

A structured approach deployed by organizations to determine the pay and benefits for each position, including mechanisms for adjustment and incentives.