42. Sophie's Pet Shop is considering the purchase of a new delivery van. Sophie Smith, owner of the shop, has compiled the following estimates in trying to determine whether the delivery van should be purchased: Cost of the van Annual net cash flows Salvage value Estimated useful life Cost of capital Present value of an annuity of 1 Present value of 1 $35,000 6,000 4,000 8 years 10% 5.335 467 Sophie's assistant manager is trying to convince Sophie that the van has other benefits that she hasn't considered in the initial estimates. These additional benefits, including the free advertising the store's name painted on the van's doors will provide, are expected to increase net cash flows by S500 each year. Instructions (a) Calculate the net present value of the van, based on the initial estimates. Should the van be purchased? (b) Calculate the net present value, incorporating the additional benefits suggested by the assistant manager. Should the van be purchased? (e) Determine how much the additional benefits would have to be worth in order for the van to be purchased. A B C D E 42. Sophie's Pet Shop is considering the purchase of a new delivery van. Sophie Smith, owner of the shop, has compiled the following estimates in trying to determine whether the delivery van should be purchased: # Cost of the van $35,000 5 Annual net cash flows 5 Salvage value 4,000 7 Estimated useful life 8 Cost of capital 10% 9 Present value of an annuity of 1 5.335 10 Present value of 1 0.467 6,000 Sophie's assistant manager is trying to convince Sophie that the van has other benefits that she hasn't considered in the initial estimates. These additional benefits, including the free advertising the store's name painted on the van's doors will provide, are expected to increase net cash flows by $500 each year. 16 (a) Calculate the net present value of the van, based on the initial estimates. Should the van be purchased? 18 Original Cash Flows 19 Salvage Value Present value Cash flows 21 Investment 22 NPV Accept or reject 24 (6) Calculate the net present value, incorporating the additional benefits 25 suggested by the assistant manager. Should the van be purchased? 26 Original Cash Flows 27 Advertising 28 Salvage Value 29 Present value Cash flows 30 Investment 31 NPV Accept or reject 34 (c) Determine how much the additional benefits would have to be worth in order for the van to be purchased