Question

ESOURCES Chapter 121 del Video) Bideo) A Video CALCULATOR MESSAGE HY INSTRUCTOR STANDARD VIEW PRINTER VERSION BACK NEXT Jane's Auto Care is considering the purchase of a new tow truck. The garage doesn't currently have a tow truck, and the $60,010 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. hital cost Estimated useful life Net annual cash flows from towing Overheu costs (end of year 4 Salvage value $60,010 8 years $7.970 $6.000 312,010 Jane'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 anual net cash flows from repair work Annual savings from plowing Additional annual net cash flows from customer goodwill Additional mual net cash flows resulting from free advertising $3,000 760 950 750 The company's cost of capital is 9%. Click here to view PV table. 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 e.g. -45 or parentheses e.g. (45). Round answer to 0 decimal 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?

it's the same question. it was too long to capture in one picture

Answer 1

1	Computation of the Net Present Value ignoring additional benefits
	Net Annual Cash flows from towing	$      7,970.00
	Annuity factor @9% for 8 years	5.534819115
	PV of Annual Inflows Cash flows	$    44,112.51
Add:	PV of Salvage Value ($12010*0.50186)	$      6,027.34
Less:	PV of Overhual Cost ($6000*0.70842)	$      4,250.52
Less:	Initial Cost	$    60,010.00
	NPV	$ (14,120.67)
Note:	Truck should not be bought in the mentioned circumstance as the NPV of cashflows are negative
2	Computation of the Net Present Value considering additional benefits
	Net Annual Cash flows from towing	$      7,970.00
	Additional Annual net cash flows from repair	$      3,000.00
	Annual saving from plowing	$          760.00
	Additional annual net cash flows from customer "Goodwill"	$          950.00
	Additional annual net cash flows from free advertisment	$          750.00
	Total Annual additional benefits	$    13,430.00
	Annuity factor @9% for 8 years	5.534819115
	PV of Annual Inflows Cash flows	$    74,332.62
Add:	PV of Salvage Value ($12010*0.50186)	$      6,027.34
Less:	PV of Overhual Cost ($6000*0.70842)	$      4,250.52
Less:	Initial Cost	$    60,010.00
	NPV	$    16,099.44
Note:	Truck can be bought in the mentioned circumstance considering the positive NPV after taking into account the additional benefits