Oriole's Auto Care is considering the purchase of a new tow truck. The garage doesn't currently have a tow price tag for a new truck would represent a major expenditure. Oriole Austen, owner of the garage, has con

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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Oriole's Auto Care is considering the purchase of a new tow truck. The garage doesn't currently have a tow truck, and the $60,020
price tag for a new truck would represent a major expenditure. Oriole Austen, owner of the garage, has compiled the following
estimates in trying to determine whether the tow truck should be purchased.
Initial cost
Estimated useful life
Net annual cash flows from towing
Overhaul costs (end of year 4)
Salvage value
$60,020
8 years
$7,960
$5,980
$12,000
Oriole's good friend, Rick Ryan, stopped by. He is trying to convince Oriole that the tow truck will have other benefits that Oriole
hasn't even considered. First, he says, cars that need towing need to be fixed. Thus, when Oriole 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 Oriole the cost of plowing her
parking lot. (Rick will give her a used plow blade for free if Oriole will plow Rick's driveway.) Third, he notes that the truck will generate
goodwill; people who are rescued by Oriole'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 "Oriole'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.
Transcribed Image Text:Oriole's Auto Care is considering the purchase of a new tow truck. The garage doesn't currently have a tow truck, and the $60,020 price tag for a new truck would represent a major expenditure. Oriole Austen, owner of the garage, has compiled the following estimates in trying to determine whether the tow truck should be purchased. Initial cost Estimated useful life Net annual cash flows from towing Overhaul costs (end of year 4) Salvage value $60,020 8 years $7,960 $5,980 $12,000 Oriole's good friend, Rick Ryan, stopped by. He is trying to convince Oriole that the tow truck will have other benefits that Oriole hasn't even considered. First, he says, cars that need towing need to be fixed. Thus, when Oriole 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 Oriole the cost of plowing her parking lot. (Rick will give her a used plow blade for free if Oriole will plow Rick's driveway.) Third, he notes that the truck will generate goodwill; people who are rescued by Oriole'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 "Oriole'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 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
The company's cost of capital is 9%.
Click here to view the factor table.
(a)
$3,010
750
Net present value $
960
740
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 O decimal places, e.g. 125. For calculation purposes,
use 5 decimal places as displayed in the factor table provided.)
Transcribed Image Text: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 The company's cost of capital is 9%. Click here to view the factor table. (a) $3,010 750 Net present value $ 960 740 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 O decimal places, e.g. 125. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)
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