Sunland's Auto Care is considering the purchase of a new tow truck. The garage doesn't currently have a tow truck, and the $60,050 price tag for a new truck would represent a major expenditure. Sunland 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 $60,050 8 years $8,010 $5,970 $12,010 Sunland's good friend, Rick Ryan, stopped by. He is trying to convince Sunland that the tow truck will have other benefits that Sunland hasn't even considered. First, he says, cars that need towing need to be fixed. Thus, when Sunland 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 Sunland the cost of plowing her parking lot. (Rick will give her a used plow blade for free if Sunland will plow Rick's driveway.) Third, he notes that the truck will generate goodwill; people who are rescued by Sunland'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 "Sunland'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 $2,990 760 1,000 750
Sunland's Auto Care is considering the purchase of a new tow truck. The garage doesn't currently have a tow truck, and the $60,050 price tag for a new truck would represent a major expenditure. Sunland 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 $60,050 8 years $8,010 $5,970 $12,010 Sunland's good friend, Rick Ryan, stopped by. He is trying to convince Sunland that the tow truck will have other benefits that Sunland hasn't even considered. First, he says, cars that need towing need to be fixed. Thus, when Sunland 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 Sunland the cost of plowing her parking lot. (Rick will give her a used plow blade for free if Sunland will plow Rick's driveway.) Third, he notes that the truck will generate goodwill; people who are rescued by Sunland'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 "Sunland'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 $2,990 760 1,000 750
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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Transcribed Image Text:Sunland's Auto Care is considering the purchase of a new tow truck. The garage doesn't currently have a tow truck, and the $60,050
price tag for a new truck would represent a major expenditure. Sunland 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
Sunland's good friend, Rick Ryan, stopped by. He is trying to convince Sunland that the tow truck will have other benefits that Sunland
hasn't even considered. First, he says, cars that need towing need to be fixed. Thus, when Sunland 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 Sunland the cost of plowing
her parking lot. (Rick will give her a used plow blade for free if Sunland will plow Rick's driveway.) Third, he notes that the truck will
generate goodwill; people who are rescued by Sunland'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 "Sunland'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.
The company's cost of capital is 9%.
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
Click here to view PV table.
(a)
Your answer is correct.
$60,050
Net present value $
8 years
$8,010
$5,970
$12,010
Should the tow truck be purchased?
The tow truck should not
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.)
-13,917.98
$2,990
be purchased.
760
1.000
750
Transcribed Image Text:Your Answer
Correct Answer (Used)
Calculate the net present value, incorporating the additional benefits suggested 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.)
Net present value $
Should the tow truck be purchased?
The tow truck should
(c)
16,523
be purchased.
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? (Round answer to O decimal places, e.g. 125.)
Present value of the intangible benefits $
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