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
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.
Compute net present value considering intangible benefits.
Initial cost $60,000 Estimated useful life 8 years Net annual cash flows from towing $8,000 Overhaul costs (end of year 4) $6,000 Salvage value $12,000 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 tailgatea 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 $3,000 Annual savings from plowing 750 Additional annual net cash flows from customer goodwill 1,000 Additional annual net cash flows resulting from free advertising 750 The company's cost of capital is 9%.
Instructions a. Calculate the net present value, ignoring the additional benefits described by Rick. Should the tow truck be purchased?
a. NPV $(13,950)
b. Calculate the net present value, incorporating the additional benefits suggested by Rick. Should the tow truck be purchased?
b. NPV $16,491
c. 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?
please show work for all formulas, etc. thank you
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started