jane’s Auto Care is considering the purchase of a new tow truck.The garage doesn’t currently have a tow truck, and the $59,960price tag for a new truck would represent a major expenditure. JaneAusten, owner of the garage, has compiled the estimates shown belowin trying to determine whether the tow truck should bepurchased.
Initial cost $59,960
Estimated useful life 8 years
Net annual cash flows from towing $7,980
Overhaul costs (end of year 4) $5,960
Salvage value $11,990
Jane’s good friend, Rick Ryan, stopped by. He is trying toconvince Jane that the tow truck will have other benefits that Janehasn’t even considered. First, he says, cars that need towing needto be fixed. Thus, when Jane tows them to her facility, her repairrevenues will increase. Second, he notes that the tow truck couldhave a plow mounted on it, thus saving Jane the cost of plowing herparking lot. (Rick will give her a used plow blade for free if Janewill plow Rick's driveway.) Third, he notes that the truck willgenerate goodwill; people who are rescued by Jane’s tow truck willfeel grateful and might be more inclined to use her service stationin 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 offree 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$3,000
Annual savings from plowing 760
Additional annual net cash flows from customer“goodwill” 1,000
Additional annual net cash flows resulting from freeadvertising 740
The company’s cost of capital is 9%.
Click here to view PV table.
Calculate the net present value, ignoring the additionalbenefits described by Rick. (If the net present value is negative,use either a negative sign preceding the number eg -45 orparentheses eg (45). Round answer to 0 decimal places, e.g. 125.For calculation purposes, use 5 decimal places as displayed in thefactor table provided.)
Net present value $
The tow truck should or should not bepurchased?
Calculate the net present value, incorporating the additionalbenefits suggested by Rick. (If the net present value is negative,use either a negative sign preceding the number eg -45 orparentheses eg (45). Round answer to 0 decimal places, e.g. 125.For calculation purposes, use 5 decimal places as displayed in thefactor table provided.)
Net present value $
Should the tow truck be purchased?
Suppose Rick has been overly optimistic in his assessment of thevalue of the additional benefits. At a minimum, how much would theadditional benefits have to be worth in order for the project to beaccepted? (Round answer to 0 decimal places, e.g. 125.)
Present value of the intangible benefits $
