P13-27A (A) Calculate the net present value, considering intangible benefits.
Prestige Auto Care is considering the purchase of a new tow truck. The garage doesn't currently have a tow truck, and the $59,990 price tag for a new truck would represent a major expenditure. Jenna Lind, owner of the garage, has compiled the following estimates in trying to determine whether the tow truck should be purchased.
Initial cost $59,990
Estimated useful life 8 years
Net annual cash flows from towing $7,996
Overhaul costs (end of year 4) $4,983
Salvage value $15,010
Jenna's good friend, Reid Shaw, stopped by. He is trying to convince Jenna that the tow truck will have other benefits that Jenna hasn't even considered. First, he says, cars that need towing need to be fixed. Thus, when Jenna 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 Jenna the cost of plowing her parking lot. (Reid will give her a used plow blade for free if Jenna will plow Reid's driveway.) Third, he notes that the truck will generate goodwill; people who are rescued by Jenna's tow truck will feel grateful and might be more inclined to used her service station in the future, or buy gas there. Fourth, the tow truck will have "Prestige Auto Care" on its doors, hood, and back tailgate - a form of free advertising wherever the tow truck goes. Reid estimates that, at a minimum, these benefits would be worth the following.
Additional annual net cash flows from repair work $3,007
Annual savings from plowing 503
Additional annual net cash flows from customer "goodwill" 988
Additional annual net cash flows resulting from free advertising 502
The company's cost of capital is 9%.
Calculate the net present value, ignoring the additional benefits described by Reid. (If the net present value is negative, put a minus sign (-) before the amount. Round answers to 0 decimal places, i.e. 12,250.)