Reference no: EM132510035

Austin Town Case study. The Austin Township Company is considering the purchase of a garbage truck. The $77,000 price tag for a new truck is a major expenditure for the company. Sharon Liu, owner of the company, has compiled the following estimates in trying to determine whether the garbage truck should be purchased

Details Amount in $ Cost of the truck $77,000

Annual net cash flows $12,000

Salvage value $15,000

Estimated useful life 10 years, Overhaul cost (end of year 5) $7,000

Estimates of benefits

One of the company's employees is trying to convince Sharon that the truck has other benefits that hasn't been considered in the initial estimates. These additional benefits, include more efficiency, lower maintenance and operating costs. Second the truck will be safer. Third, the new truck has the ability to handle recycled materials at the same time as garbage, thus offering a new revenue source. Estimates of the minimum value of these benefits amount to $2000 (see break up below)

1. Annual savings from reduced operating costs $400
2. Annual savings from reduced maintainence costs $800
3. Additional annual net cash savings from reduced employee absence $500
4. Additional annual net cash inflows from recycling $300
5. Total $2,000
6. The company cost of capital is 10%

Solve the below :

Question (a) Calculate the net present value of the truck, ignore the additional benefits. Should the truck be purchased?

Question (b) Calculate the net present value of the truck,add the additional benefits. Should the truck be purchased?

Question (c) Suppose the management has been overly optimistic in assessing the value of the additional benefits. At a minimum, how much would the additional benefits have to be worth in order for Sharon to purchase the truck

Question (d) If Sharon does not consider buying the truck, would the Austin benefit from not having the truck, give reasons on why ?