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The Sun Corp

Accounting

The Sun Corp. is contemplating the acquisition of an automatic car wash. The following information is relevant:

The cost of the car wash is $160,000

The anticipated revenue from the car wash is $100,000 per annum.

The useful life of the car wash is 10 years.

Annual operating costs are expected to be:

    Salaries

$30,000

 

    Utilities

9,600

 

    Water usage

4,400

 

    Supplies

6,000

 

    Repairs/maintenance

10,000

 

The firm uses straight-line depreciation.

 

 

The salvage value for the car wash is zero.

 

 

The company's cutoff points are as follows:

 

 

    Payback

3 years

 

    Accounting rate of return

18%

 

    Internal rate of return

18%

 

Ignore income taxes.

Required:

a.

Compute the annual cash inflow.

b.

Compute the net present value.

c.

Compute internal rate of return.

d.

Compute the payback period.

e.

Compute the profitability index.

f.

Should the car wash be purchased?

 

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