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 should be purchased.
Initial cost $60,000
Estimated useful life 8 years
Net annual cash flows from towing $8,000
Overhauel costs (end of 4 years) $ 6,000
Salvage value $12,000
Janes 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 blade for free if Jane will plow Ricks driveway. Third he notes that the truck will generate goodwill; People who are rescued by Jane’s tow truck will fell grateful and might be more inclined to use her service station in the future or buy gas their. Fourth the tow truck will have Jane 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 wroth 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%
(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. n At a minimum, how much would the additional benefits have to be wroth in order for the project to be accepted?