29 Jun Question 17. Florida Car Wash is
Question
17. Florida Car Wash is considering a new project whose data is shown below. The equipment to be
used would be depreciated by the straight-line method over the project’s 3 year life and would have a zero
salvage value after Year 3. No new working capital would be required. Revenue 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?
WACC 15.00%
Net investment cost (depreciable basis) $70,000.00
Number of cars washed 3,500
Average price per car $25.00
Fixed cash operating costs (excluding depreciation) $12,000.00
Variable operating costs/unit (i.e., VC per car washed) $5.5000
Marginal tax rate 34.00%
18. Refer to problem 17. Assume that Florida Car Wash’s new project now requires $20,000 in new
working capital at the start of the project, and assume that the new working capital will be recovered
at the end of the project. By how much will the project’s NPV change if the number of cars washed is
at the expected level?
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