A garage is installing a new 'bubble-wash' car wash, which requires an initial investment of $280,000 in year 0. It will promote the car wash as a fun activity for the family and it is expected that the novelty of this approach will boost sales the medium term. The garage plans on using an opportunity cost of capital of 10% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projections: Year 1 Year 2 Revenues Costs of Goods Sold Gross Profit Selling, General and Admin Depreciation EBIT 120 000 -60 000 60 000 -6 000 -70 000 -16 000 400 000 -200 000 200 000 -6 000 -70 000 124 000 Year 3 400 000 -200 000 200 000 -6 000 -70 000 124 000 Year 4 300 000 -150 000 150 000 -6 000 -70 000 74 000

A garage is installing a new 'bubble-wash' car wash, which requires an initial investment of $280,000 in year 0. It will promote the car wash as a fun activity for the family and it is expected that the novelty of this approach will boost sales the medium term. The garage plans on using an opportunity cost of capital of 10% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projections: Year 1 Year 2 Revenues Costs of Goods Sold Gross Profit Selling, General and Admin Depreciation EBIT 120 000 -60 000 60 000 -6 000 -70 000 -16 000 400 000 -200 000 200 000 -6 000 -70 000 124 000 Year 3 400 000 -200 000 200 000 -6 000 -70 000 124 000 Year 4 300 000 -150 000 150 000 -6 000 -70 000 74 000

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 7PA: There are two projects under consideration by the Rainbow factory. Each of the projects will require...

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A garage is installing a new 'bubble-wash' car wash, which requires an initial investment of $280,000 in year 0. It will promote the car wash as a fun activity for the family and it is expected that the novelty of this approach will boost sales in the medium term. The garage plans on using an opportunity cost of capital of 10% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projections: Year 1 Year 2 Year 3 Year 4 Revenues 120 000 400 000 400 000 300 000 -Cost of goods sold -66 000 -206 000 -206 000 -156 000 -Depreciation -70 000 -70 000 -70 000 -70 000 +EBIT -16 000 124 000 124 000 74 000 -Taxes (30%) 4 800 -37 200 -37 200 -22 200 =Profit after tax -11 200 86 800 86 800 51 800 Changes in NOWC -5 000 -5 000 -5 000 -5 000 The net present value (NPV) for this project is closest to: a. -$145,283 O b. $76,607 O c. -$214,525 ○ d. $119,888
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