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:

Output

The total amount of goods or services produced by a person, machine, or company.

Producing Units

Entities, such as factories or workshops, involved in the manufacture of goods or the provision of services.

Efficient Scale

The level of production at which a firm's average costs are minimized, and efficiency is maximized.

Production

The process of creating goods and services through the combination of labor, materials, and technology.