Managerial Accounting: Tools for Business Decision Making
7th Edition
ISBN: 9781118334331
Author: Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso
Publisher: WILEY
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Textbook Question
Chapter 12, Problem 12.4AP
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 |
$8,000 |
| Overhaul costs (end of year 4) | $6,000 |
| 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
| Additional annual net cash flows from repair work | $3,000 |
| Annual savings from plowing | 750 |
| Additional annual net cash flows from customer “goodwill” | 1,000 |
| Additional annual net cash flows resulting from free advertising | 750 |
The company's cost of capital is 9%.
Instructions
(a) Calculate the
(b) Calculate the net present value, incorporating the additional benefits suggested by Rick. Should the tow truck be purchased?
(c) Suppose Rick 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?
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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.
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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…
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,…
Wildhorse's Auto Care is considering the purchase of a new tow truck. The garage doesn't currently have a tow truck, and the $59,950
price tag for a new truck would represent a major expenditure. Wildhorse Austen, owner of the garage, has compiled the following
estimates in trying to determine whether the tow truck should be purchased.
Initial cost
$59,950
Estimated useful life
8 years
Net annual cash flows from towing
$7,990
Overhaul costs (end of year 4)
$5,970
Salvage value
$12,000
Show Transcribed Text
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Wildhorse's good friend, Rick Ryan, stopped by. He is trying to convince Wildhorse that the tow truck will have other benefits that
Wildhorse hasn't even considered. First, he says, cars that need towing need to be fixed. Thus, when Wildhorse 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 Wildhorse
the cost of plowing her parking lot. (Rick will give her a used plow blade for free if…
Chapter 12 Solutions
Managerial Accounting: Tools for Business Decision Making
Ch. 12 - Prob. 1QCh. 12 - Prob. 2QCh. 12 - Tom Wells claims the formula for the cash payback...Ch. 12 - Prob. 4QCh. 12 - What is the decision rule under the net present...Ch. 12 - Discuss the factors that determine the appropriate...Ch. 12 - What simplifying assumptions were made in the...Ch. 12 - What are some examples of potential intangible...Ch. 12 - What steps can be taken to incorporate intangible...Ch. 12 - Prob. 10Q
Ch. 12 - Prob. 11QCh. 12 - Prob. 12QCh. 12 - Prob. 13QCh. 12 - What are the strengths of the annual rate of...Ch. 12 - Prob. 15QCh. 12 - Prob. 16QCh. 12 - Prob. 12.1BECh. 12 - Hsung Company accumulates the following data...Ch. 12 - Thunder Corporation, an amusement park, is...Ch. 12 - Caine Bottling Corporation is considering the...Ch. 12 - McKnight Company is considering two different,...Ch. 12 - Prob. 12.6BECh. 12 - Prob. 12.7BECh. 12 - Prob. 12.8BECh. 12 - Prob. 12.9BECh. 12 - Prob. 12.1DICh. 12 - Prob. 12.2DICh. 12 - Prob. 12.3DICh. 12 - Prob. 12.4DICh. 12 - Prob. 12.5DICh. 12 - Prob. 12.1ECh. 12 - Doug's Custom Construction Company is considering...Ch. 12 - Prob. 12.3ECh. 12 - BAK Corp. is considering purchasing one of two new...Ch. 12 - Bruno Corporation is involved in the business of...Ch. 12 - BSU Inc. wants to purchase a new machine for...Ch. 12 - Iggy Company is considering three capital...Ch. 12 - Prob. 12.8ECh. 12 - Legend Service Center just purchased an automobile...Ch. 12 - Vilas Company is considering a capital investment...Ch. 12 - Drake Corporation is reviewing an investment...Ch. 12 - U3 Company is considering three long-term capital...Ch. 12 - Prob. 12.2APCh. 12 - Brooks Clinic is considering investing in new...Ch. 12 - Jane's Auto Care is considering the purchase of a...Ch. 12 - Prob. 12.5APCh. 12 - Prob. 12CDCh. 12 - Luang Company is considering the purchase of a new...Ch. 12 - Prob. 12.2BYPCh. 12 - Tecumseh Products Company has its headquarters in...Ch. 12 - Prob. 12.4BYPCh. 12 - Prob. 12.5BYPCh. 12 - Prob. 12.6BYPCh. 12 - Prob. 12.8BYP
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