Name: Date: Instructor: Course: Managerial Accounting, 3rd Edition, by Weygandt, Kieso, and Kimmel Solving Managerial Accounting Problems Using Microsoft Excel for Windows by Rex A Schildhouse Problem P12-4A, Prestige 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. Jenna Lind, owner of the garage, has compiled the following estimates in trying to determine whether the tow truck should be purchased. Initial cost $60,000 Estimated useful life 8 years Net annual cash flows from towing $8,000 Overhaul costs (end of year 4) $5,000 Salvage value $15,000 Jenna's good friend, Reid Shaw, stopped by. He is trying to convince Jenna that the tow truck will have other benefits that Jenna hasn't even considered. First, he says, cars that need towing need to be fixed. Thus, when Jenna tows them to her facility her repair revenues will increase. Second, he notes that the tow truck could have a plow attached to it, thus saving Jenna the cost of plowing her parking lot. (Reid will give her a used blade for free if Jenna will plow Reid's driveway.) Third, he notes that the truck will generate goodwill; people who are rescued by Jenna's tow truck will feel grateful and might be more inclined to use her service station in the future, or buy gas there. Fourth, the tow truck will have "Prestige Auto Care" on its doors, hood, and back tailgate - a form of free advertising wherever the tow truck goes. Reid estimates that, at a minimum, these benefits would be worth the following: Additional annual net cash flows from repair work 3000 Annual savings from plowing 500 Additional annual net cash flows from customer "goodwill" 1000 Additional annual net cash flows resulting from free advertising 500 The company's cost of capital is 9% Instructions: (a) Calculate the net present value, ignoring the additional benefits described by Reid. Should the tow truck be purchased? Using the original estimates, the net present value is calculated as follows: Cash 9% Discount Present Flows X Factor = Value Title Amount X PV Formula = Formula Title Amount X PV Formula = Formula Title Amount X PV Formula = Formula Formula Title Amount Title Formula (b) Calculate the net present value, incorporating the additional benefits suggested by Reid. Should the tow truck be purchased? The net present value based on the revised estimates is as follows: Cash 9% Discount Present Flows X Factor = Value Title Formula X PV Formula = Formula Title Amount X PV Formula = Formula Title Amount X PV Formula = Formula Formula Title Amount Title Formula (c) Suppose Reid 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? FileName: f921c49a-8200-445c-9e42-fa1edd6f2b28.xls, Tab: Problem P12-4A, Page 1 of 2, 9/13/2011, 4:56 PM Instructions for the Microsoft Excel Templates Detail and information on Excel is contained within the manual. Striking the "F1" key or following the path "Windows>Excel Help" will invoke the Office Assistant and bring up one of several help menus. Type your name into the cell "D5". This will be copied by formula to the rest of the pages as required. Type the due date of your problem into cell "I5". This will be copied by formula to the rest of the pages as required. Type the instructor's name into cell "D6". This will be copied by formula to the rest of the pages as required. Type the course identifier into cell "I6". This will be copied by formula to the rest of the pages as required. The problem is identified for you in cell "B7". In "DATE" cells enter the date in any of several formats and Excel will format it correctly. If more than one page is preformatted into the problem, page breaks are preset and formulas are set to copy the header into the remaining pages. Place the proper account title in the cell where the word "ACCOUNT" appears on the template. Place the amount in the cell where the word "AMOUNT" appears on the template. A formula may be placed in Enter a number like 914 to signify units or gallons where the word "NUMBER" appears. Write a formula into cells where the word "FORMULA" appears. In these cells, an amount calculated outside of Place the explanation for the entry in the cell where the word "EXPLANATION" appears on the template. Insert the account number where "ACCT #" appears on the template during posting. Insert the journal reference where "JOURN #" appears on the template during posting. Insert the title in the cell where "TITLE" appears on the template. The print area is defined to fit onto 8 1/2" X 11" sheets in portrait or landscape mode as required. The gray filled cells define the perimeter of the problem and the print area. The problem is formatted for whole dollars with comma separations (no cents) except where required. The display may have "Freeze Pane" invoked so column titles remain visible during data entry. Negative values may be shown as ($400) vice -$400. Enter a string like: ($259,417 X 12 months) + (0.3651 X 5,434,631) where the word TEXT appears.
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