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Cash Flows-Capbud PDF

1. Kent Duncan plans to open a self-service car wash and has determined the initial investment needed, expected annual cash flows, and terminal cash flows. The initial investment is $202,000. Expected annual net cash receipts are $72,000. Terminal cash flows after 5 years are $20,000. 2. Bilboa Freightlines must decide whether to overhaul its current delivery truck or purchase a new diesel truck. Information is provided on purchase price, salvage value, operating costs, and depreciation method for each option. Calculations are required to determine which option has the higher NPV using a 16% discount rate. 3. Saxon Products is considering purchasing an automated robot for its

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309 views

Cash Flows-Capbud PDF

1. Kent Duncan plans to open a self-service car wash and has determined the initial investment needed, expected annual cash flows, and terminal cash flows. The initial investment is $202,000. Expected annual net cash receipts are $72,000. Terminal cash flows after 5 years are $20,000. 2. Bilboa Freightlines must decide whether to overhaul its current delivery truck or purchase a new diesel truck. Information is provided on purchase price, salvage value, operating costs, and depreciation method for each option. Calculations are required to determine which option has the higher NPV using a 16% discount rate. 3. Saxon Products is considering purchasing an automated robot for its

Uploaded by

Erjohn Papa
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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I. In five years, Kent Duncan will retire. He is exploring the possibility of opening a self-service car wash.

The car wash could be managed in the free time he has available from his regular occupation, and it
could be closed easily when he retires. After careful study, Mr. Duncan has determined the following:
a. A building in which a car wash could be installed is available under a five-year lease at a cost of $1,700
per month.
b. Purchase and installation costs of equipment would total $200,000. The equipment will be
depreciated using SYD for five years to zero salvage value. In five years the equipment could be sold for
about 10% 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 five years, this working capital would be released for
investment elsewhere.
d. Both a wash and a vacuum service would be offered with a wash costing $2.00 and the vacuum
costing $1.00 per use.
e. The only variable costs associated with the operation would be 20 cents per wash for water and 10
cents 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. Gross receipts from the wash would be about $1,350 per week. According to the experience of other
car washes, 60% of the customers using the wash would also use the vacuum. Mr. Duncan will not open
the car wash unless it provides at least a 10% return.
h. Tax rate is 40%
Required: Assuming that the car wash will be open 52 weeks a year, compute the (a) initial investment
(b) expected annual net cash receipts and (c) the terminal cash flows.

II. Bilboa Freightlines, S.A., of Panama, has a small truck that it uses for intracity deliveries. The truck is
worn out and must be either overhauled or replaced with a new truck. The company has assembled the
following information: If the company keeps and overhauls its present delivery truck, then the truck will
be usable for five more years. If a new truck is purchased, it will be used for five years, after which it will
be traded in on another truck. The new truck would be diesel-operated, resulting in a substantial
reduction in annual operating costs, as shown above. The company computes depreciation on a straight-
line basis. All investment projects are evaluated using a 16% discount rate. Tax rate is 40%.
Present Truck New Truck
Purchase Price $21,000 $30,000
Book Value 11,500
Overhaul Needed Now $7,000
Annual Cash Operating Costs $10,000 $6,500
Salvage value now $9,000
Salvage value after five years $1,000 $4,000
Depreciation method Straight-line Straight-line
Required: Assuming that the car wash will be open 52 weeks a year, compute the (a) initial investment
(b) expected annual net cash receipts and (c) the terminal cash flows.
III. Saxon Products, Inc., is investigating the purchase of a robot for use on the company’s assembly
line. Selected data relating to the robot are provided below:
Cost of the robot . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,600,000
Installation and software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $450,000
Annual savings in labor costs . . . . . . . . . . . . . . . . . . . . . . . . . . ?
Annual savings in inventory carrying costs . . . . . . . . . . . . . . . . $210,000
Monthly increase in power and maintenance costs . . . . . . . . . $2,500
Salvage value in 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $70,000
Useful life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 years

The robot will be depreciated for 3 years to zero salvage value. Tax rate is 40%.
Engineering studies suggest that use of the robot will result in a savings of 25,000 direct labor-hours
each year. The labor rate is $16 per hour. Also, the smoother work flow made possible by the use of
automation will allow the company to reduce the amount of inventory on hand by $400,000. This
inventory reduction will take place at the end of the first year of operation; the released funds will
be available for use elsewhere in the company. Saxon Products has a 20% required rate of return.
Shelly Martins, the controller, has noted that all of Saxon’s competitors are automating their
plants. She is pessimistic, however, about whether Saxon’s management will allow it to automate.
In preparing the proposal for the robot, she stated to a colleague, “Let’s just hope that reduced labor
and inventory costs can justify the purchase of this automated equipment. Otherwise, we’ll never
get it. You know how the president feels about equipment paying for itself out of reduced costs.”

Required: Assuming that the car wash will be open 52 weeks a year, compute the (a) initial investment
(b) expected annual net cash receipts and (c) the terminal cash flows.

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