John's 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. John Gibsen, 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 $7,971
- Overhaul costs (end of year 4) $4,977
- Salvage value $15,010
John's good friend, Jake Jenkins, stopped by. He is trying to convince John that the tow truck will have other benefits that John hasn't even considered. First, he says, cars that need towing need to be fixed. Thus, when John 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 John the cost of plowing her parking lot. (Jake will give her a used plow blade for free if John will plow Jake's driveway.) Third, he notes that the truck will generate goodwill; people who are rescued by John'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 "John's Auto Care" on its doors, hood, and back tailgate - a form of free advertising wherever the tow truck goes. Jake estimates that, at a minimum, these benefits would be worth the following.
- Additional annual net cash flows from repair work $3,000
- Annual savings from plowing 496
- Additional annual net cash flows from customer "goodwill" 996
- Additional annual net cash flows resulting from free advertising 503
- The company's cost of capital is 9%.
a. Calculate the net present value, ignoring the additional benefits described by Jake
b.Calculate the net present value, incorporating the additional benefits suggested by Jake.
c.Suppose Jake 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 0 decimal places, e.g. 125.)