Problem 24-4A (part level submission) (a) The tow truck should not (correct) be
ID: 2481983 • Letter: P
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Problem 24-4A (part level submission)
(a)
The tow truck should not (correct) be purchased.
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(b)
The tow truck should (correct) be purchased.
Should (correct)
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(c)
Problem 24-4A (part level submission)
Jane’s Auto Care is considering the purchase of a new tow truck. The garage doesn’t currently have a tow truck, and the $59,990 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. Initial cost $59,990 Estimated useful life 8 years Net annual cash flows from towing $7,998 Overhaul costs (end of year 4) $6,008 Salvage value $12,010Jane’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 tailgate—a 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 $2,991 Annual savings from plowing 745 Additional annual net cash flows from customer “goodwill” 963 Additional annual net cash flows resulting from free advertising 742
The company’s cost of capital is 9%.
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(For calculation purposes, use 5 decimal places as displayed in the factor table provided.)
(a)
Your answer is correct. Calculate the net present value, ignoring the additional benefits described by Rick. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round answer for present value to 0 decimal places, e.g. 125.) Net present value $(13951) correctShould the tow truck be purchased?
The tow truck should not (correct) be purchased.
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Attempts: 1 of 3 used(b)
Your answer is correct. Calculate the net present value, incorporating the additional benefits suggested by Rick. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round answer for present value to 0 decimal places, e.g. 125.) Net present value $ 16164 16164Should the tow truck be purchased?
The tow truck should (correct) be purchased.
Should (correct)
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Attempts: 2 of 3 used(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? (Round answer to 0 decimal places, e.g. 125.) The present value of the intangible benefits $Explanation / Answer
A) Net present value, ignoring the additional benefits described by Rick
= present value of cash inflow - present value of cash outflow
= 46038.68 - 59990 = (13951.32)
The tow truck should not be purchased as net present value is negative
Present value of cash outflow
Particulars
(at Y= 0) Amount
Cash outflow
59990
PVF (Y=0)
1
Present value of cash outflow
599990
Present value of cash Intflow
Particulars
Y=1
Y=2
Y=3
Y=4
Y=5
Y=6
Y=7
Y=8
Net annual cash flows from towing
$7,998
$7,998
$7,998
$7,998
$7,998
$7,998
$7,998
$7,998
Less- Overhaul costs
($6,008)
Add- salvage value at end
$12,010
Net annual cashflow
$7,998
$7,998
$7,998
$1,990
$7,998
$7,998
$7,998
$20,008
Present value factor
0.91743
0.84168
0.77218
0.70842
0.64993
0.59627
0.54703
0.50187
PV of cash inflow
7337.61
6731.76
6175.90
1409.76
5198.14
4768.97
4375.15
10041.41
Present value of cash Inflow= 46038.68
B). Net present value, incorporating the additional benefits suggested by Rick
= present value of cash inflow - present value of cash outflow
= 76154 - 59990 = 16164
The tow truck should be purchased as net present value is positive
Present value of cash outflow
Particulars
(at Y= 0) Amount
Cash outflow
59990
PVF (Y=0)
1
Present value of cash outflow
599990
Present value of cash Intflow
Particulars
Y=1
Y=2
Y=3
Y=4
Y=5
Y=6
Y=7
Y=8
Net annual cash flows from towing
$7,998
$7,998
$7,998
$7,998
$7,998
$7,998
$7,998
$7,998
Additional annual net cash flows from repair work
$2,991
$2,991
$2,991
$2,991
$2,991
$2,991
$2,991
$2,991
Annual savings from plowing
$745
$745
$745
$745
$745
$745
$745
$745
Additional annual net cash flows from customer “goodwill”
$963
$963
$963
$963
$963
$963
$963
$963
Additional annual net cash flows resulting from free advertising
$742
$742
$742
$742
$742
$742
$742
$742
Less- Overhaul costs
$6,008
Add- salvage value at end
$12,010
Net annual cashflow
$13,439
$13,439
$13,439
$7,431
$13,439
$13,439
$13,439
$25,449
Present value factor
0.91743
0.84168
0.77218
0.70842
0.64993
0.59627
0.54703
0.50187
PV of cash inflow
12329
11311.
10377
5264
8734
8013.
7351
12772
Present value of cash Inflow= 76154
c) Value of the additional benefits have to be worth in order for the project to be accepted = 13952
Particulars
(at Y= 0) Amount
Cash outflow
59990
PVF (Y=0)
1
Present value of cash outflow
599990
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