Jane’s Auto Care Please Help! Weygandt, Financial & Managerial Accounting, 2a He
ID: 2391113 • Letter: J
Question
Jane’s Auto CarePlease Help!
Weygandt, Financial & Managerial Accounting, 2a Help I Sys PRINTER VERSION BACK NEXT Question 4 Jane's Auto Care is considering the purchase of a new tow truck. The garage doesn't currently heve a tow truck, and the $60,020 price tag for a new truck would represent a major expenditure. Jane Austen, owner of the garage, has compliled the estimates shown below in trying to determine whether the tow truck should be purchased $60,020 8 years Initial cost Estimated useful ife Net annual cash flows from towing $8,010 Overhaul costs (end of year 4) 5,990 Salvage value $12,000 ane's good friend, Rick Ryan, stopped by. He is trying to convince Jane that the tow truck will have other benefits thet Jane hasnt even considered. First, he says, cars that need towing need to be fixed. Thus, when Jane tows them to her fadility, 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 wil 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 beck tellgate-a form of free advertising wherever the tow truck goes. Rick estimates that, at a minimum, these benerits would be worth the following Adcitional ennual net cash flows from repair work Annual savings from plawing Additional annual net cash flows from customer "goodwill Additional annual net cesh flows resulting from free advertising 3,000 740 970 760 The company's cost of capital is 9%. Cisk here to view Py table E] Your answer is incorrect. Try again. Calculate the net present value, ignoring the additional benefits described by Rick. (f the net present value is negative, use elther a negative sign preceding the number eg -45 or parentheses eg (43). Round answer to 0 decímai places, e.g 125. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Net present value Should the tow truck be purchased? tow trucik not j be purchas
Explanation / Answer
Calculation of Net Present Value Ignoring Additional Benefits stated by Rick
Year
Annual Cash Flow
Cash Outflow
Net Cash Flows
NPV Factor at 9% Discount rate
Discounted Cash Flow
0
$ (60,020.00)
$ (60,020.00)
1
$ (60,020)
1
$ 8,010.00
$ 8,010.00
0.917
$ 7,349
2
$ 8,010.00
$ 8,010.00
0.842
$ 6,742
3
$ 8,010.00
$ 8,010.00
0.772
$ 6,185
4
$ 8,010.00
$ (5,990.00)
$ 2,020.00
0.708
$ 1,431
5
$ 8,010.00
$ 8,010.00
0.650
$ 5,206
6
$ 8,010.00
$ 8,010.00
0.596
$ 4,776
7
$ 8,010.00
$ 8,010.00
0.547
$ 4,382
8
$ 20,010.00
$ 20,010.00
0.502
$ 10,042
Net Present Value
$ (13,907)
Net Present Value
$ (13,907)
The tow Truck should not be Purchased
Reason- It has negative Net Present Value
Calculation of Net Present Value after considering Additional Benefits stated by Rick
Year
Annual Cash Flow
Cash Outflow
Additional Benefits
Net Cash Flows
NPV Factor at 9% Discount rate
Discounted Cash Flow
0
$ (60,020.00)
$ (60,020.00)
1
$ (60,020)
1
$ 8,010.00
$ 5,470.00
$ 13,480.00
0.917
$ 12,367
2
$ 8,010.00
$ 5,470.00
$ 13,480.00
0.842
$ 11,346
3
$ 8,010.00
$ 5,470.00
$ 13,480.00
0.772
$ 10,409
4
$ 8,010.00
$ (5,990.00)
$ 5,470.00
$ 7,490.00
0.708
$ 5,306
5
$ 8,010.00
$ 5,470.00
$ 13,480.00
0.650
$ 8,761
6
$ 8,010.00
$ 5,470.00
$ 13,480.00
0.596
$ 8,038
7
$ 8,010.00
$ 5,470.00
$ 13,480.00
0.547
$ 7,374
8
$ 20,010.00
$ 5,470.00
$ 25,480.00
0.502
$ 12,788
Net Present Value
$ 16,368
Net Present Value
$ 16,368
The tow Truck should be purchased
Calculation of Net Present Value Ignoring Additional Benefits stated by Rick
Year
Annual Cash Flow
Cash Outflow
Net Cash Flows
NPV Factor at 9% Discount rate
Discounted Cash Flow
0
$ (60,020.00)
$ (60,020.00)
1
$ (60,020)
1
$ 8,010.00
$ 8,010.00
0.917
$ 7,349
2
$ 8,010.00
$ 8,010.00
0.842
$ 6,742
3
$ 8,010.00
$ 8,010.00
0.772
$ 6,185
4
$ 8,010.00
$ (5,990.00)
$ 2,020.00
0.708
$ 1,431
5
$ 8,010.00
$ 8,010.00
0.650
$ 5,206
6
$ 8,010.00
$ 8,010.00
0.596
$ 4,776
7
$ 8,010.00
$ 8,010.00
0.547
$ 4,382
8
$ 20,010.00
$ 20,010.00
0.502
$ 10,042
Net Present Value
$ (13,907)
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.