Unit VIII question 19 part a Pharoah's Auto Care is considering the purchase of a new tow truck. The garage doesn't currently have a tow truck, and the $59,960price tag for a new truck would represent a major expenditure. Pharoah Austen, owner of the garage, has compiled the followingestimates in trying to determine whether the tow truck should be purchased.Initial cost096'65Estimated useful lifeB yearsNet annual cash flows from towing0867Overhaul costs (end of year 4)$5,960Salvage value$12,000Pharoah's good friend, Rick Ryan, stopped by. He is trying to convince Pharoah that the tow truck will have other benefits thatPharoah hasn't even considered. First, he says, cars that need towing need to be fixed. Thus, when Pharoah 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 Pharoah the costof plowing herparking lot. (Rickwill give her a used plow blade for free if Pharoah will plow Rick's driveway.) Third, he notes that thetruck will generate goodwill; people who are rescued by Pharoah's tow truck will feel grateful and might be more inclined to use herservice station in the future or buy gas there. Fourth, the tow truck will have "Phargah'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 worththe following.Additional annual net cash flows from repair work$2,990Annual savings from plowingAdditional annual net cash flows from customer"goodwill",1,010Additional annual net cash flows resulting from free advertising076The company's cost of capital is 9%.Click here to view PV table.(e)Calculate the net present value, ignoring the additional benefits described by Rick. (If the net present value is negative, use either anegative sign preceding the number e.g. 45 or parentheses e.g. (45). Round answer to O decimal places, eg. 125. For calculation purposes,use 5 decimal places as displayed in the factor table provided.)Net present valueShould the tow truck be purchased?The tow truckbe purchased.eTextbook and Media

The decision regarding whether to purchase the asset or not depends upon various factors and one of…

Answered: Calculate the net present value,…

Business

Accounting

Calculate the net present value, ignoring the additional benefits described by Rick. negative signjpreceding the oumt

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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