0, S weyoandt minanclal & Monagerdal Acceunting, 2e Help I Problem 26-4A ane\'s
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0, S weyoandt minanclal & Monagerdal Acceunting, 2e Help I Problem 26-4A ane's Auto Care is considering the purchase of a new tow truck. The garage doesnt currently have a tow truck, and the $60,030 price tag for a new truck would represent a major expenditure. Jane whether the tow truck should be purchased. r Austen, owner of the garage, has complied the estimates shown below in trying to determine Initial cost Estimated useful lde $60,030 years Net annual cash fows from towing $8,050 Overhaul costs (end of year 4)$5,960 Salvage value 11,990 Janes good friend, Rick Ryan, stopped by. Hie is trying to convince Jane that the tow truck will have other benefits that Jane hasnt even considered. First, he says, cars that need towing need to be fixed. Thus, when Jane tows them to her facility, her repair revenues wil increase Second, he notes that the tow truck could have a plow mounted on it, thus saving lane the cost of plowing her parking lot. (Rick will give her a used plow blade for free if are wili plow Rick's driveway.) Third, he notes that the truck wE generate goodwill; people who are rescued by 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 folewing. $3,000 Additional annual net cash flows from repair werk Annual savings from plowing Additional annual net cash flows from customer "goodwit" Additional annual net cash flows resting from free·dvertising 760 The company's cost of capital is 9%. Your answer is partially carrect. Try again. Caiculatethe net present value, igonng the additional benefits descrted by Rick. (irthe net present value la negative, use either a purposes, use 5 decimal places as displayed in the factor table provided.J the number eg -45 or parentheses eg (45) Round answer to o decimal places, ag. 125. For calculation 7Explanation / Answer
Jane's Auto Care Net Present Value without additional benefit Cash flow P.v Factor Present Value Initial Cost $ (60,000.00) 1 $ (60,000.00) Cash flow $ 8,050.00 5.535 $ 44,556.75 Overhaul cost at the end of year 4 $ 5,960.00 0.708 $ 4,219.68 Salvage Value at the end of year 8 $ 11,990.00 0.502 $ 6,018.98 NPV $ (5,204.59) The NPV is negative so Tow truck should not be purchased. Net Present Value with additional benefit Cash flow Cash flow each year $ 8,050.00 Net Cash flow from repair work $ 3,000.00 Annual savings from planning $ 760.00 Annual net cash flow from customer goodwill $ 980.00 Annual net cash flow resulting from free advertising $ 760.00 Total Cash flow $ 13,550.00 Cash flow P.v Factor Present Value Initial Cost $ (60,000.00) 1 $ (60,000.00) Cash flow $ 13,550.00 5.535 $ 74,999.25 Overhaul cost at the end of year 4 $ 5,960.00 0.708 $ 4,219.68 Salvage Value at the end of year 8 $ 11,990.00 0.502 $ 6,018.98 NPV $ 25,237.91 The NPV is possitive so Tow truck should be purchased. Suppose Rick has been overly optimastic in his assessment of the value of the additional benefits.At minimum benefit to be worth in order for the project should be accepted would be NPV Without considering additional Benefit+ NPV with considering benefit=($25237.91+5204.59) Minimum Benefit would be= $ 30,442.50
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