Rocky Top Car Wash Is Considering a New Project Whose

question 10

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.) WACC10.0%
Net capital investment cost$60,000
Number of cars washed2,800
Average price per car$25.00
Fixed cash operating cost$10,000
Variable op. cost/unit (i.e., per car washed) $5.357
Annual capital cost allowance$20,000
Tax rate35.0%

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

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Definitions:

Note Receivable

A written promise that one party will receive a specified sum of money from another party at a future date.

Interest Rate

The percentage of a sum of money charged for its use, often expressed as an annual percentage.

Note Duration

The length of time until a note payable or receivable is due to be paid or received.

Promissory Note

A monetary tool that involves a formal commitment from one entity to give a specific amount of cash to another, either when asked or at an agreed-upon date in the future.