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 $60,000 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. 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. 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.) Should the tow truck be purchased?

Explanation / Answer

NPV calculation Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Cost Of Truck       (60,000) Overhaul cost      (5,980) Net Annual Cash Flow from towing        8,030        8,030        8,030         8,030     8,030      8,030    8,030       8,030 Savage Value     12,000 Net Cash Flows       (60,000)        8,030        8,030        8,030         2,050     8,030      8,030    8,030     20,030 PV factor @9%                    1        0.917        0.842        0.772         0.708     0.650      0.596    0.547       0.502 PV of Cash Flows       (60,000)        7,367        6,759        6,201         1,452     5,219      4,788    4,393     10,052 NPV =Sum of PV of Cash flows= $   (13,769) NPV of Truck = $   (13,769) The truck Should not be purchased.

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