Carla Vistas Auto Care is considering the purchase of a new tow truck. The garage doesnt currently have a tow truck, and the $60,040 price tag for a new truck would represent a major expenditure. Carla Vista Austen, owner of the garage, has compiled the following estimates in trying to determine whether the tow truck should be purchased.
| Initial cost | | $60,040 | |
| Estimated useful life | | 8 years | |
| Net annual cash flows from towing | | $7,970 | |
| Overhaul costs (end of year 4) | | $5,970 | |
| Salvage value | | $12,000 | |
Carla Vista's good friend, Rick Ryan, stopped by. He is trying to convince Carla Vista that the tow truck will have other benefits that Carla Vista hasn't even considered. First, he says, cars that need towing need to be fixed. Thus, when Carla Vista 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 Carla Vista the cost of plowing her parking lot. (Rick will give her a used plow blade for free if Carla Vista will plow Rick's driveway.) Third, he notes that the truck will generate goodwill; people who are rescued by Carla Vista'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 "Carla Vista'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. $3,010 760 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 960 750 The company's cost of capital is 9%. Click here to view PV table. (a) Your answer is correct. 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 decimal places, e.g. 125. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Net present value $ - $14,134 Should the tow truck be purchased? The tow truck should not be purchased. (b) Your answer is correct. Calculate the net present value, incorporating the additional benefits suggested by Rick. (If the net present value is negative, use either a negative sign preceding the number e.g. -45 or parentheses e.g. (45). Round answer to decimal places, eg. 125. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Net present value $ 16,196 Should the tow truck be purchased? The tow truck should be purchased. eTextbook and Media Attempts: 2 of 5 used (c) * Your answer is incorrect. Suppose Rick has been overly optimistic in his assessment of the value of the additional benefits. At a minimum, how much would the additional benefits have to be worth in order for the project to be accepted? (Round answer to decimal places, e.g. 125.) Present value of the intangible benefits $ 30,330
