Compute net present value considering intangible benefits. LO 2, 3), E Jane's Auto Care is considering the purchase of a new tow truck. The garage doesn't currently have a tow truck, and the $60,000 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. XLS Initial cost Estimated useful life Net annual cash flows from towing Overhaul costs (end of year 4) Salvage value $60,000 8 years $8,000 $6,000 $12,000 Problems: Set B and Set C 1199 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 wher- ever the tow truck goes. Rick estimates that, at a minimum, these benefits would be worth the following. Additional annual net cash flows from repair work Annual savings from plowing Additional annual net cash flows from customer "goodwill" Additional annual net cash flows resulting from free advertising $3,000 750 1,000 750 The company's cost of capital is 9%.
Compute net present value considering intangible benefits. LO 2, 3), E Jane's Auto Care is considering the purchase of a new tow truck. The garage doesn't currently have a tow truck, and the $60,000 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. XLS Initial cost Estimated useful life Net annual cash flows from towing Overhaul costs (end of year 4) Salvage value $60,000 8 years $8,000 $6,000 $12,000 Problems: Set B and Set C 1199 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 wher- ever the tow truck goes. Rick estimates that, at a minimum, these benefits would be worth the following. Additional annual net cash flows from repair work Annual savings from plowing Additional annual net cash flows from customer "goodwill" Additional annual net cash flows resulting from free advertising $3,000 750 1,000 750 The company's cost of capital is 9%.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Please answer all 3 parts
Transcribed Image Text:Instructions
(a) Calculate the net present value, ignoring the additional benefits described by Rick.
Should the tow truck be purchased?
(b) Calculate the net present value, incorporating the additional benefits suggested by
Rick. Should the tow truck be purchased?
(c) Suppose Rick has been overly optimistic in his assessment of the value of the
additional benefits. At a minimum, how much would the additional benefits have to
be worth in order for the project to be accepted?
Transcribed Image Text:P24-4A Jane's Auto Care is considering the purchase of a new tow truck. The garage
doesn't currently have a tow truck, and the $60,000 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.
Compute net present value
considering intangible benefits.
(LO 2, 3), E
XLS
Initial cost
Estimated useful life
Net annual cash flows from towing
Overhaul costs (end of year 4)
Salvage value
$60,000
8 years
$8,000
$6,000
$12,000
Problems: Set B and Set C 1199
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 wher-
ever the tow truck goes. Rick estimates that, at a minimum, these benefits would be worth
the following.
Additional annual net cash flows from repair work
Annual savings from plowing
Additional annual net cash flows from customer "goodwill"
Additional annual net cash flows resulting from free advertising
$3,000
750
1,000
750
The company's cost of capital is 9%.
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