John’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. John Gibsen, owner of the garage, has compiled the estimates shown on the next page 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

John’s good friend, Jake Jenkins, stopped by. He is trying to convince John that the tow truck will have other benefits that John hasn’t even considered. First, he says, cars that need towing need to be fixed. Thus, when John tows them to his facility, his repair revenues will increase. Second, he notes that the tow truck could have a plow mounted on it, thus saving John the cost of plowing his parking lot. (Jake will give him a used plow blade for free if John will plow Jake’s driveway.) Third, he notes that the truck will generate goodwill; people who are rescued by John’s tow truck will feel grateful and might be more inclined to use his service station in the future, or buy gas there. Fourth, the tow truck will have “John’s Auto Care” on its doors, hood, and back tailgate—a form of free advertising wherever the tow truck goes. Jake 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 500
Additional annual net cash flows from customer “goodwill” 1,000
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 Jake. Should the tow truck be purchased?
(b) Calculate the net present value, incorporating the additional benefits suggested by Jake. Should the tow truck be purchased?
(c) Suppose Jake 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?