Jane\'s Auto Care is considering the purchase of a new tow truck. The garage doe

Question

Jane's Auto Care is considering the purchase of a new tow truck. The garage doesn't currently have a tow truck, and the $60,030 price tag for a new truck would represent a major expenditure. Jane Austen, owner of the garage, has compiled the estimates shown below in trying to determine whether the tow truck should be purchased Initial cost Estimated useful life Net annual cash flows from towing Overhaul costs (end of year 4) Salvage value $60,030 8 years $8,050 $5,960 $11,990 Jane's good friend, Rick Ryan, stopped by. He is trying to convince Jane that the tow truck will have other benefits that Jane hasn't even considered. First, he says, cars that need towing need to be fixed. Thus, when Jane tows them to her facility, her repair revenues will increase. Second, he notes that the tow truck could have a plow mounted on it, thus saving Jane the cost of plowing her parking lot. (Rick will give her a used plow blade for free if Jane will plow Rick's driveway.) Third, he notes that the truck will generate goodwill; people who are rescued by Jane's tow truck will feel grateful and might be more inclined to use her service station in the future or buy gas there. Fourth, the tow truck will have "Jane's Auto Care" on its doors, hood, and back tailgate-a form of free advertising wherever the tow truck goes. Rick estimates that, at a minimum, these benefits would be worth the following Additional annual net cash flows from repair work Annual savings from plowing Additional annual net cash flows from customer "goodwill Additional annual net cash flows resulting from free advertising $3,000 760 980 760 The company's cost of capital is 9%. ick he Calculate the net present value, ignoring the additional benefits described by Rick. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round answer to 0 decimal places, e.g 125. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Net present value s Should the tow truck be purchased? The tow truck be purchased

Explanation / Answer

Solution 1:

As NPV is negative, therefore tow truck should not be purchased.

Solution 2:

As NPV is positive, therefore Tow truck must be purchased.

Solution 3:

The minimum present value of addtional benefit is the value at which NPV will be zero, therefore

Present value of additional benefits required at minimum for acceptance of project = $13,680

Computation of NPV - Jane's Auto Care (Ignoring additional benefits) Particulars Amount Period PV Factor Present Value Cash Outflows: Initial investment in Truck $60,030 0 1 $60,030 Overhaul cost $5,960 4 0.70843 $4,222 Present Value of Cash Outflows (A) $64,252 Cash Inflows: Annual cash inflows from Towing $8,050 1-8 5.53482 $44,555 Salvage Value $11,990 8 0.50187 $6,017 Present Value of Cash Inflows (B) $50,573 Net Present Value (B-A) -$13,680

Related Questions

Navigate

• Browse (All)
• Browse J
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.