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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The Sun Corp

Accounting Feb 09, 2021

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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