$\begin{array}{lrrrr}
&\text { Year 0 } &\text { Year 1 } & \text { Year 2 } & \text { Year 3 } & \text { Year 4 } \
\text { Revenues }&&120,000 & 400,000 & 400,000 & 300,000\
\text { Costs of Goods Sold } && -60,000 & -200,000 & -200,000 & -150,000\\
\text { Gross Profit } && 60,000 & 200,000 & 200,000 & 150,000 \
\text { Selling, General and Admin } && -6,000 & -6,000 & -6,000 & -6,000 \
\text { Depreciation } && -70,000 & -70,000 & -70,000 & -70,000\
\hline \text { EBIT } && -16,000 & 124,000 & 124,000 & 74,000 \
\text { Income } \operatorname{tax}(30 \%) & &4,800 & -37,200 & -37,200 & -22,200 \
\hline \text { Incremental Earnings } && -11,200 & 86,800 & 86,800 & 51,800\\
\text { Capital Purchases } &-280,000\
\text { Changes to NWC }&&-5,000 &-5,000 &-5,000 &-5,000\
\end{array}$ A garage is installing a new "bubble-wash" car wash. 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. If the cost of capital is 10%, what is the net present value (NPV) of this project?

Question

Quizplus · Accepted Answer

The correct answer is A because the NPV of the project is $119,888. The NPV is calculated by taking the present value of the incremental earnings and subtracting the initial investment. The present value of the incremental earnings is calculated by multiplying the incremental earnings by the present value factor. The present value factor is calculated by dividing 1 by (1 + r)^n, where r is the cost of capital and n is the number of years. In this case, the cost of capital is 10% and the number of years is 5. The present value factor is therefore 0.62092. The present value of the incremental earnings is therefore $119,888. The initial investment is $280,000. The NPV is therefore $119,888 - $280,000 = -$160,112.

A Garage Is Installing a New "Bubble-Wash" Car Wash