Question

Jane’s Auto Care is considering the purchase of a new tow truck.
The garage doesn’t currently have a tow truck, and the $60,030
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 | $60,030 | ||

Estimated useful life | 8 years | ||

Net annual cash flows from towing | $8,010 | ||

Overhaul costs (end of year 4) | $5,980 | ||

Salvage value | $11,990 |

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 | 740 | ||

Additional annual net cash flows from customer “goodwill” | 960 | ||

Additional annual net cash flows resulting from free advertising | 750 |

The company’s cost of capital is 9%.

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 0 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 shouldshould not be purchased. |

Answer #1

NPV = -$13915.10

As the NPV is negative, the tow truck should not be purchased.

I have solved it below:

Please let me know in case you have any queries and I will be happy to assist you.

Jane’s Auto Care is considering the purchase of a new tow truck.
The garage doesn’t currently have a tow truck, and the $60,030
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
$60,030
Estimated useful life
8 years
Net annual cash flows from towing
$8,010
Overhaul costs (end of year 4)
$6,000
Salvage...

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...

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