Kent Duncan has $150,000 to invest. He is exploring the possibility of opening a selfservice car wash. Duncan plans to operate the car wash for eight years. After eight years,
Duncan will close the car wash and retire to Florida. After careful study, Mr. Duncan has
determined the following:
a) A building in which a car wash could be installed is available under an eight-year lease
at a cost of $1,700 per month.
b) Purchase and installation costs of equipment would total $150,000. In eight years the
equipment could be sold for about 10 percent of its original cost.
c) An investment of an additional $2,000 would be required to cover working capital
needs for cleaning supplies, change funds, and so forth. After eight years, this working
capital would be released for investment elsewhere.
d) Both a car wash and a vacuum service would be offered with a wash costing $1.50 and
the vacuum costing $.25 per use.
e) The only variable costs associated with the operation would be $.23 per wash for water
and $.10 per use of the vacuum for electricity.
f) In addition to rent, monthly costs of operation would be: cleaning, $450; insurance,
$75; and maintenance, $500.
g) Duncan estimates that 900 customers will use the car wash each week. According to
the experience of other car washes, 70 percent of the customers using the wash also use
the vacuum.
h) To obtain the $150,000 investment, Kent Duncan will sell the corporate bonds that he
has owned for 10 year. These bonds pay annual interest of 12%. You may assume that
Kent will sell these bonds for $150,000 which is exactly what he paid for them 10 years
ago.
A. Without considering any income tax implications, calculate the net present value of
the investment using a cost of capital (minimum required return on investment) of 12
percent. [For ease of reading and grading, create a table similar to the one used in class
when calculating a project’s NPV.]
B. Based upon your answer to Part A and ignoring risk, should Kent Duncan make this
investment?
C. Now consider risk. List three distinctly different ways that you could change your
analysis in Part A if the risk associated with this investment is unusually high.
