Langley Town Case study. The Langley Township Company is considering the purchase of a garbage truck. Kevin Liu, owner of the company, has compiled the following estimates in trying to determine whether the garbage truck should be purchased

Details Amount in $ Cost of the truck $77,000 Annual net cash flows $12,000 Salvage value $15,000 Estimated useful life 10 years Cost of capital 10% Overhaul cost (end of year 5) $7,000

Estimates of benefits

One of the company's employees is trying to convince Kevin that the truck has other benefits that hasn't been considered in the initial estimates. These additional benefits, include more efficiency, lower maintainance and operating costs. Second the truck will be safer. Third, the new truck has the ability to handle recycled materials at the same time as garbage, thus offering a new revenue source. Estimates of the minimum value of these benefits amount to $2000 (see break up below)

Annual savings from reduced operating costs $400 Annual savings from reduced maintainence costs $800 Additional annual net cash savings from reduced employee absence $500 Additional annual net cash inflows from recycling $300 Total $2,000

Solve the below :

(a) Calculate the net present value of the truck, ignore the additional benefits. Should the truck be purchased?

(b) Calculate the net present value of the truck,add the additional benefits. Should the truck be purchased?

Suppose the management has been overly optimistic in assessing the value of the additional benefits. At a minimum, how much would the additional benefits have to be worth in order for Kevin to purchase the truck

(d) If Kevin does not consider buying the truck, would the Langley benefit from not having the truck