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Thunder Corporation, an amusement park, is considering a capitalinvestment in a new exhibit. The exhibit would cost $182,762 andhave an estimated useful life of 10 years. It will be sold for$63,400 at that time. (Amusement parks need to rotate exhibits tokeep people interested.) It is expected to increase net annual cashflows by $25,100. The company’s borrowing rate is 8%. Its cost ofcapital is 10%. Click here to view PV table.

Calculate the net present value of this project to the companyand determine whether the project is acceptable. Show yourwork.

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Nelly Stracke
Nelly StrackeLv2
28 Sep 2019

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Thunder Corporation, an amusement park, is considering a capitalinvestment in a new exhibit. The exhibit would cost $166,169 andhave an estimated useful life of 9 years. It will be sold for$68,300 at that time. (Amusement parks need to rotate exhibits tokeep people interested.) It is expected to increase net annual cashflows by $23,100. The company’s borrowing rate is 8%. Its cost ofcapital is 10%. Calculate the net present value of this project tothe company and determine whether the project is acceptable.

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jane’s Auto Care is considering the purchase of a new tow truck.The garage doesn’t currently have a tow truck, and the $59,960price tag for a new truck would represent a major expenditure. JaneAusten, owner of the garage, has compiled the estimates shown belowin trying to determine whether the tow truck should bepurchased.

Initial cost $59,960

Estimated useful life 8 years

Net annual cash flows from towing $7,980

Overhaul costs (end of year 4) $5,960

Salvage value $11,990

Jane’s good friend, Rick Ryan, stopped by. He is trying toconvince Jane that the tow truck will have other benefits that Janehasn’t even considered. First, he says, cars that need towing needto be fixed. Thus, when Jane tows them to her facility, her repairrevenues will increase. Second, he notes that the tow truck couldhave a plow mounted on it, thus saving Jane the cost of plowing herparking lot. (Rick will give her a used plow blade for free if Janewill plow Rick's driveway.) Third, he notes that the truck willgenerate goodwill; people who are rescued by Jane’s tow truck willfeel grateful and might be more inclined to use her service stationin 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 offree 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$3,000

Annual savings from plowing 760

Additional annual net cash flows from customer“goodwill” 1,000

Additional annual net cash flows resulting from freeadvertising 740

The company’s cost of capital is 9%.

Click here to view PV table.

Calculate the net present value, ignoring the additionalbenefits described by Rick. (If the net present value is negative,use either a negative sign preceding the number eg -45 orparentheses eg (45). Round answer to 0 decimal places, e.g. 125.For calculation purposes, use 5 decimal places as displayed in thefactor table provided.)

Net present value $

The tow truck should or should not bepurchased?

Calculate the net present value, incorporating the additionalbenefits suggested by Rick. (If the net present value is negative,use either a negative sign preceding the number eg -45 orparentheses eg (45). Round answer to 0 decimal places, e.g. 125.For calculation purposes, use 5 decimal places as displayed in thefactor table provided.)

Net present value $

Should the tow truck be purchased?

Suppose Rick has been overly optimistic in his assessment of thevalue of the additional benefits. At a minimum, how much would theadditional benefits have to be worth in order for the project to beaccepted? (Round answer to 0 decimal places, e.g. 125.)

Present value of the intangible benefits $

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