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 1-3.)
Net investment cost (depreciable basis) $60,000
Number of cars washed 2,800
Average price per car $25.00
Fixed op. cost excl. depr'n $10,000
Variable op. cost/unit (i.e. per car washed) $5.357
Annual depreciation $20,000
Tax rate 35.0%
Please see the attached file.
Cash Washes 2,800 2,800 2,800
Price 25 25 25
Variable cost 5 5 5
Income before depreciation 45,000 45,000 45,000 ...
The solution explains how to calculate the change in NPV when there is a change in one of the variables