(SO 2, 3) Calculate the net pres- ent value considering intangible benefits. P13
ID: 2792924 • Letter: #
Question
(SO 2, 3) Calculate the net pres- ent value considering intangible benefits. P13-40B 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: The Fort McMurchy Sanitation Company is considering the purchase of a garbage truck. The $77,000 price tag Initial cost Estimated useful life Net annual cash flows Overhaul costs (end of year 5) Salvage value $77,000 10 years $12,000 7,000 $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 Problems: Set B 589 Annual savings from reduced operating costs Annual savings from reduced maintenance costs Additional annual net cash savings from reduced employee absence Additional annual net cash inflows from recycling $400 800 500 300 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 (a) NPV $(1,828) (b) NPV $10,461 much would the additional benefits have to be worth in order for Kalia to purchase the truck?Explanation / Answer
1.
NPV=-77000+12000/1.1+12000/1.1^2+12000/1.1^3+12000/1.1^4+12000/1.1^5+12000/1.1^6+12000/1.1^7+12000/1.1^8+12000/1.1^9+12000/1.1^10+15000/1.1^10-7000/1.1^5
=-1829.49
2.
Annual total savings=400+800+500+300=2000
NPV=-1829.49+2000/1.1+2000/1.1^2+2000/1.1^3+2000/1.1^4+2000/1.1^5+2000/1.1^6+2000/1.1^7+2000/1.1^8+2000/1.1^9+2000/1.1^10=10459.64
3
Lets say minimum adiditonal benefits be x
Then NPV should be >0
NPV=-1829.49+x/1.1+x/1.1^2+x/1.1^3+x/1.1^4+x/1.1^5+x/1.1^6+x/1.1^7+x/1.1^8+x/1.1^9+x/1.1^10
=>-1829.49+x/1.1+x/1.1^2+x/1.1^3+x/1.1^4+x/1.1^5+x/1.1^6+x/1.1^7+x/1.1^8+x/1.1^9+x/1.1^10>0
=>x>297.7411
So, Minimum addiitonal benefits=298
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