Question

# Jane’s Auto Care is considering the purchase of a new tow truck. The garage doesn’t currently...

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.

 Initial cost \$60,000 Estimated useful life 8 years Net annual cash flows from towing \$7,990 Overhaul costs (end of year 4) \$5,990 Salvage value \$12,000

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 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 \$3,010 Annual savings from plowing 750 Additional annual net cash flows from customer “goodwill” 970 Additional annual net cash flows resulting from free advertising 740

The company’s cost of capital is 9%.

Question:

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 eg -45 or parentheses eg (45). Round answer to 0 decimal places, e.g. 125. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

Solution :

 Computation of NPV - Jane's Auto Care (Incorporating additional benefits) Particulars Amount Period PV Factor Present Value Cash Outflows: Initial investment in Truck \$60,000 0 1 \$60,000 Overhaul cost \$5,990 4 0.70843 \$4,243 Present Value of Cash Outflows (A) \$64,243 Cash Inflows: Annual cash inflows from Towing \$7,990 1-8 5.53482 \$44,223 Additional annual net cash flows from repair work \$3,010 1-8 5.53482 \$16,660 Annual savings from plowing \$750 1-8 5.53482 \$4,151 Additional annual net cash flows from customer “goodwill” \$970 1-8 5.53482 \$5,369 Additional annual net cash flows resulting from free advertising \$740 1-8 5.53482 \$4,096 Salvage Value \$12,000 8 0.50187 \$6,022 Present Value of Cash Inflows (B) \$80,521 Net Present Value (B-A) \$16,278

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