a edugen for S weveandt Rinancial a Managerial Acceunting, 2 Help l PRINTER VERS
ID: 2595727 • Letter: A
Question
a edugen for S weveandt Rinancial a Managerial Acceunting, 2 Help l PRINTER VERSION BACK Problem 26-4A ane' s Auto Care is considering the purchase of a new tow truck. The new truck would represent a major expenditure whether the tow truck should be purchased garage doesn't currently have a tow truck, and the $60,030 price tag for a Jane Austen, owner of the garage, has compiled the estimates shown below in trying to determine Initial cost Estimated useful Iife 8 years Net annual cash flows from towing $8,050 Overhaul costs (end of year 4) $5,960 Salvage value $11,990 Jane that the tow truck will have other benefits that Jane hasnt even considered. First, he says, cers that need Second, he notes that the tow truck could have a plow mounted on it, thus saving Jene the cost of pl plow blade for free if Jane will plow Rick's driveway.) Third, he tow truck will feel grateful and might be more incined to use her service station in the future or buy gas there. Jane's Auto Care" on its doors, hood, and back mnimum, these benefits would be worth the following towing need to be fixed, Thus, when lane tows them to her faclity, her repair revenues wil increase owing her parking lot. (Rick will give hera Rartthe tow evx will have notes that the truck will generate goodwil; people who are rescued by Jane's tailgate-a form of free advertising wherever the tow truck goes. Rick estimates that, at a Additional annual net cash fiows from repair work Annuai savings from plowing Additional annual net cash friows from customer "goodwill" $3,000 760 Adetional annual net cash fows resulting fronm free advertising The company's cost or capital is g%. Cick here to view PVtabie 60 Calcuate the net present value, ignoring the adeiional benefits described by Rick. (If the net present egative sign preceding the anumber eg 45 or parentheses eg (45). Round answer to o d purposes, use 5 decimal places as displayed in the factor table provided.) value is negative, use either Net present value sExplanation / Answer
Ignoring the additional benefits
The net present value is -$6,465.76
The tow truck should not be purchased.
Working:
Incorporating the additional benefits
The net present value is $23,975.65
The tow truck should be purchased.
Working:
The minimum additional benefits required for the proposal to be accepted is $1,168.20
Working:
The revised answer is given below.
Ignoring the additional benefits
The net present value is -$12,448.40
The tow truck should not be purchased.
Working:
Incorporating the additional benefits
The net present value is $17,993.00
The tow truck should be purchased.
Working:
Years 0 1-8 8 Initial cost -60030 Net annual cash flows 8050 Overhaul 5960 Salvage value 11990 Total cash flows -60030 8050 17950 Cost of capital 9% 9% 9% Discounting factor 1 5.5348 0.5019 Present value -60030 44555.14 9009.105 Net Present Value -6465.76Related Questions
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