Janes Auto Care is considering the purchase of a new tow truck. The garage doesnt currently have a tow truck, and the $60,030 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.

Janes good friend, Rick Ryan, stopped by. He is trying to convince Jane that the tow truck will have other benefits that Jane hasnt 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 Janes 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 Janes 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.

The companys cost of capital is 9%.

a. Calculate the net present value, ignoring the additional benefits described by Rick.

b. Calculate the net present value, incorporating the additional benefits suggested by Rick

c. Suppose Rick has been overly optimistic in his assessment of the value of the additional benefits. At a minimum, how muchwould the additional benefits have to be in order for the project to be accepted?

Initial cost Estimated useful life Net annual cash flows from towing Overhaul costs (end of year 4) Salvage value $60,030 8 years $8,050 $5,960 $11,990 $3,000 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 760 980 760