The Fort McMurchy Sanitation Company is considering the purchase of a garbage truck. The $77,000 price tag for a new truck would represent a major expenditure for the company. Kalia Vang, owner of the company, has compiled the following estimates in trying to determine whether she should purchase the garbage truck:

Initial cost...........................................$77,000

Estimated useful life..............................10 years

Net annual cash flows.............................$12,000

Overhaul costs (end of year 5) ....................$7,000

Salvage value.......................................$15,000

One of the company's employees is trying to convince Kalia that the truck has other merits that have not been considered in the initial estimates. First, the new truck will be more efficient, with lower maintenance and operating costs. Second, the new 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 are as follows:

Annual savings from reduced operating costs................................$400

Annual savings from reduced maintenance costs..............................800

Additional annual net cash savings from reduced employee absence......500

Additional annual net cash inflows from recycling...........................300

The company's cost of capital is.................................................10%.

Instructions

(a) Calculate the net present value, ignoring the additional benefits. Should Kalia purchase the truck? 

(b) Calculate the net present value, including the additional benefits. Should Kalia purchase the truck?

(c) Suppose 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 Kalia to purchase the truck?