Rocky Top Car Wash Is Considering a New Project Whose

question 17

Multiple Choice

Rocky Top Car Wash is considering a new project whose data are shown below.The equipment that would be used has a 3-year tax life,would be depreciated by the straight-line method over the project's 3-year life,and would have zero salvage value.No new working capital would be required.Revenues and other operating costs are expected to be constant over the project's 3-year life.This is just one project for the firm,so any losses can be used to offset gains on other firm projects.If the number of cars washed declined by 50% from the expected level,by how much would the project's NPV change? (Hint: Cash flows are constant in Years 1 to 3.) $\begin{array}{lr}\text { WACC } & 10.0 \% \\\text { Net capital investment cost } & \$ 60,000 \\\text { Number of cars washed } & 2,800 \\\text { Average price per car } & \$ 25.00 \\\text { Fixed cash operating cost } & \$ 10,000 \\\text { Variable op. costiunit (i.e., per car washed) } & \$ 5.357 \\\text { Annual capital cost allowance } & \$ 20,000 \\\text { Tax rate } & 35.0 \%\end{array}$

• A)$38,113
• B)$40,119
• C)$42,230
• D)$44,453

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Definitions:

Revenue Variance

The difference between the actual revenue earned and the expected revenue that was budgeted for a specific period.

Actual Revenue

The real income that a company generates from its business activities, reported during a specific period.

Static Planning Budget

A budget designed for a single level of activity and does not change even if the level of activity changes.

Fixed Costs

Expenses that remain constant for a company irrespective of the level of production or sales.