N1.Account Oriole's Auto Care is considering the purchase of a new tow truck. The garage doesn't currently have a tow truck, and the $60,020price tag for a new truck would represent a major expenditure. Oriole Austen, owner of the garage, has compiled the followingestimates in trying to determine whether the tow truck should be purchased.Initial costEstimated useful lifeNet annual cash flows from towingOverhaul costs (end of year 4)Salvage value$60,0208 years$7,960$5,980$12,000Oriole's good friend, Rick Ryan, stopped by. He is trying to convince Oriole that the tow truck will have other benefits that Oriolehasn't even considered. First, he says, cars that need towing need to be fixed. Thus, when Oriole tows them to her facility, her repairrevenues will increase. Second, he notes that the tow truck could have a plow mounted on it, thus saving Oriole the cost of plowing herparking lot. (Rick will give her a used plow blade for free if Oriole will plow Rick's driveway.) Third, he notes that the truck will generategoodwill; people who are rescued by Oriole's tow truck will feel grateful and might be more inclined to use her service station in thefuture or buy gas there. Fourth, the tow truck will have "Oriole's Auto Care" on its doors, hood, and back tailgate-a form of freeadvertising 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 workAnnual savings from plowingAdditional annual net cash flows from customer "goodwill"Additional annual net cash flows resulting from free advertisingThe company's cost of capital is 9%.Click here to view the factor table.(a)$3,010750Net present value $960740Calculate the net present value, ignoring the additional benefits described by Rick. (If the net present value is negative, use either anegative sign preceding the number e.g.-45 or parentheses e.g. (45). Round answer to O decimal places, e.g. 125. For calculation purposes,use 5 decimal places as displayed in the factor table provided.)

Over a predetermined time period, the cash inflows and outflows related to the investment are…

Oriole's Auto Care is considering the purchase of a new tow truck. The garage doesn't currently have a tow price tag for a new truck would represent a major expenditure. Oriole Austen, owner of the garage, has con

Oriole's Auto Care is considering the purchase of a new tow truck. The garage doesn't currently have a tow price tag for a new truck would represent a major expenditure. Oriole Austen, owner of the garage, has con

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 18P: Filkins Fabric Company is considering the replacement of its old, fully depreciated knitting...

See similar textbooks

Similar questions

Sunland's Auto Care is considering the purchase of a new tow truck. The garage doesn't currently have a tow truck, and the $60,050 price tag for a new truck would represent a major expenditure. Sunland Austen, owner of the garage, has compiled the following estimates in trying to determine whether the tow truck should be purchased. Initial cost Estimated useful life Net annual cash flows from towing Overhaul costs (end of year 4) Salvage value The company's cost of capital is 9%. Sunland's good friend, Rick Ryan, stopped by. He is trying to convince Sunland that the tow truck will have other benefits that Sunland hasn't even considered. First, he says, cars that need towing need to be fixed. Thus, when Sunland 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 Sunland the cost of plowing her parking lot. (Rick will give her a used plow blade for free if Sunland will plow Rick's driveway.) Third,…
City Towing is considering the purchase of a new tow truck. The garage currently has no tow truck, and the $100,000 price tag for a new truck would be a major expenditure. The expected useful life is 7 years. The owner of the garage has compiled the following estimates in trying to determine whether the tow truck should be purchased: Purchase of truck $100,000 Salvage value $15,000 Additional net inflows per year $16,000 Repairs required at the end of year 3 $5,000 Minimum required return on investments 12%
D**M Pizza has a delivery car that is uses for pizza deliveries. The transmission needs to be replaced, and there are several other repairs that need to be done. The car is nearing the end of its life, so the options are to either overhaul the car or replace it with a new car. D&M’s has put together the following budgetary items: If D&M replaces the transmission of the pizza delivery vehicle, they expect to be able to use the vehicle for another 5 years. If they purchase a new vehicle, they will sell the existing one and use the new vehicle for 5 years and then trade it in for another new pizza delivery vehicle. If they trade for the new delivery vehicle, their operating expenses will decrease because the new vehicle is more gas efficient. This project is analyzed using a discount rate of 15%. What should D&M do?
Morrel University has a small shuttle bus that is in poor mechanical condition. The bus can be either overhauled now or replaced with a new shuttle bus. The following data have been gathered concerning these two alternatives (Ignore income taxes.): Purchase cost new Remaining net book value 0 Present Bus $ 32,000 $ 21,000 $ 9,000 $ 12,000 $ 10,000 $ 2,000 Major repair needed now Annual cash operating costs Salvage value now 0 $ 8,000 0 Trade-in value in seven years $ 5,000 Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using the tables provided. The University could continue to use the present bus for the next seven years. Whether the present bus is used or a new bus is purchased, the bus would be traded in for another bus at the end of seven years. The University uses a discount rate of 12% and the total cost approach to net present value analysis. If the new bus is purchased, the present value of the annual cash operating costs…
A local sanitation authority needs to purchase a new garbage truck. The authority has two truck models under consideration. The purchase price for Model A is $90, 000. The maintenance and operation costs are $10,000/year. Model B is less expensive to acquire ($60,000 at purchase), but costs more on operation and maintenance. Details of the costs are shown in the table below. Interest rate is 3%. Please help this authority to decide which truck they should purchase. Year Model A Truck Model B Truck Purchase Price $90,000 $60,000 Annual Operation and Maintenance 1 $10,000 $20,000 2 $10,000 $20,000 3 $10,000 $20,000 4 $10,000 $20,000 Calculate the present values of total costs for Model A Truck and Model B Truck, respectively. (Interest rate: 3%) (1’) *Results round to the nearest 2 decimal places. (Note: you may consider using an Excel worksheet to do the calculation). Present value of Model A Truck…
A local waste management company needs to purchase a new garbage truck. The company has two truck models under consideration. The purchase price for Model A is $90, 000. The maintenance and operation costs are $10,000/year. Model B is less expensive to acquire ($60,000 at purchase), but costs more on operation and maintenance. Details of the costs are shown in the table below. Interest rate is 4%. Please help this company to decide which truck they should purchase. Year Model A Truck Model B Truck Purchase Price (beginning of year) $90,000 $60,000 Annual Operation and Maintenance (end of year) 1 $10,000 $20,000 2 $10,000 $20,000 3 $10,000 $20,000 4 $10,000 $20,000 Calculate the present values of total costs for Model A Truck and Model B Truck, respectively. (Interest rate: 4%) *Results round to the nearest 2 decimal places. (Note: you may consider using an Excel…
A local sanitation authority needs to purchase a new garbage truck. The authority has two truck models under consideration. The purchase price for Model A is $90, 000. The maintenance and operation costs are $10,000/year. Model B is less expensive to acquire ($60,000 at purchase), but costs more on operation and maintenance. Details of the costs are shown in the table below. Interest rate is 4%. Please help this authority to decide which truck they should purchase. Year Model A Truck Model B Truck Purchase Price (beginning of year) $90,000 $60,000 Annual Operation and Maintenance (end of year) 1 $10,000 $20,000 2 $10,000 $20,000 3 $10,000 $20,000 4 $10,000 $20,000 Calculate the present values of total costs for Model A Truck and Model B Truck, respectively. (Interest rate: 4%) (2’) Present value of Model A Truck total costs: Present value of Model B Truck total costs: Which truck model should this authority choose? Why? (1’)
A local sanitation authority needs to purchase a new garbage truck. The authority has two truck models under consideration. The purchase price for Model A is $90, 000. The maintenance and operation costs are $10,000/year. Model B is less expensive to acquire ($60,000 at purchase), but costs more on operation and maintenance. Details of the costs are shown in the table below. Interest rate is 4%. Please help this authority to decide which truck they should purchase. Year Model A Truck Model B Truck Purchase Price (beginning of year) $90,000 $60,000 Annual Operation and Maintenance (end of year) 1 $10,000 $20,000 2 $10,000 $20,000 3 $10,000 $20,000 4 $10,000 $20,000 The authority charges garbage collection fees from local residents. The estimated fee collection is $38,000 per year. Compare the present value of total costs of the truck model you choose and the present value of total revenues. Calculate the present value of total…
A small town is considering two potential alternatives for a garbage collection system. The following cost data has been compiled. If the interest rate is 7%, Using the conventional B/C ratio, what is the ratio and which alternative should be chosen? Salvage value is considered an offset to the original cost. System A System B Year O, first cost 350,000 250,000 Annual savings 32,000 22,000 Salvage value 50,000 40,000 LIfe 30 30
Hartley's Meat Pies is considering replacing its existing delivery van with a new one. The new van can offer considerable savings in operating costs. Information about the existing van and the new van follow: Existing van New van Original cost $50,000 $92,000 Annual operating cost $19,500 $14,000 Accumulated depreciation $34,000 — Current salvage value of the existing van $25,500 — Remaining life 9 years 9 years Salvage value in 9 years $ 0 $ 0 Annual depreciation $1778 $10,222 If Hartley's Meat Pies replaces the existing delivery van with the new one, over the next 8 years operating income will: increase by $98,000 decrease by $98,000 increase by $60,000 decrease by $60,000
Papa John’s Pizza has a delivery car that is uses for pizza deliveries. The transmission needs to be replaced, and there are several other repairs that need to be done. The car is nearing the end of its life, so the options are to either overhaul the car or replace it with a new car. Papa John’s has put together the following budgetary items: Present Car New Car Purchase cost new $30,000 Transmission and repairs $6,500 Annual cash operating cost $8,500 $7,500 Fair market value now $6,000 Fair market value in five years $1,000 $6,000 If Papa John replaces the transmission of the pizza delivery vehicle, they expect to be able to use the vehicle for another 5 years. If they purchase a new vehicle, they will sell the existing one and use the new vehicle for 5 years and then trade it in for another new pizza delivery vehicle. If they trade for the new delivery vehicle, their operating expenses will decrease because the new…
Crane Corp. is considering purchasing one of two new diagnostic machines. Either machine would make it possible for the company to bid on jobs that it currently isn't equipped to do. Estimates regarding each machine are provided here. Original cost Estimated life Salvage value Estimated annual cash inflows Estimated annual cash outflows Net present value Machine A $77,000 8 years 0 Profitability index $19,900 $4,800 Machine A Which machine should be purchased? Click here to view the factor table. Calculate the net present value and profitability index of each machine. Assume a 9% discount rate. (If the net present value is negative. use either a negative sign preceding the number eg -45 or parentheses eg (45). Round answer for present value to 0 decimal places, e.g. 125 and profitability index to 2 decimal places, e.g. 10.50. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Machine B should be purchased. $188,000 8 years 0 $40,200 $9,860…