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

question 15

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.) $\begin{array}{lr}\text { WACC } & 10.0 \% \\\text { Net investment cost (depreciable basis) } & \$ 60,000 \\\text { Number of cars washed } & 2,800 \\\text { Average price per car } & \$ 25.00 \\\text { Fixed op. cost (excl. deprec.) } & \$ 10,000 \\\text { Variable op. cost/unit (i.e., VC per car washed) } & \$ 5.375 \\\text { Annual depreciation } & \$ 20,000 \\\text { Taxrate } & 35.0 \%\end{array}$

• A) $28,939
• B) $30,462
• C) $32,066
• D) $33,753
• E) $35,530

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Definitions:

Data-Gathering Process

The systematic procedure of collecting, measuring, and analyzing accurate data for research or assessment purposes.

Conclusions Drawn

Inferences or judgments made after considering all the available evidence and arguments.

Conceptualizing Balance

The process of creating a harmonious or balanced framework for understanding or analyzing a concept or phenomenon.

Stable Constructs

Psychological attributes or traits that are consistent and enduring over time, showing little variation across situations or in response to interventions.