Question

Carson Trucking is considering whether to expand its regional service center in​ Mohab, UT. The expansion requires the expenditure of $10,500,000 on new service equipment and would generate annual net cash inflows from reduced costs of operations equal to $4,000,000 per year for each of the next 7 years. In year 7 the firm will also get back a cash flow equal to the salvage value of the​ equipment, which is valued at $1.1 million. ​ Thus, in year 7 the investment cash inflow totals $5,100,000. Calculate the​ project's NPV using a discount rate of 7 percent.   

If the discount rate is 7 percent, then the​ project's NPV is $ ___

Answer 1

ANSWER :-

Given data :-

expenditure of  first year = $10,500,000

for each of the next 7 years, annual net cash inflows = $4,000,000

investment cash inflow totals = $5,100,000.

discount rate = 7 %

Here we need to find out project's NPV.

Here present values are taken from present value table at interest rate of 7% .

Year	cash flows	present value @ 7%	discounted cash flows
0	-$ 10,500,000	1.000	= -$ 10,500,000 * 1.000 = -$ 10,500,000.00
1	$ 4,000,000	0.935	= $ 4,000,000 * 0.935 = $ 3,740,000
2	$ 4,000,000	0.873	= $ 4,000,000 * 0.873 = $ 3,492,000
3	$ 4,000,000	0.816	= $ 4,000,000 * 0.816 = $ 3,264,000
4	$ 4,000,000	0.763	= $ 4,000,000 * 0.763 = $ 3,052,000
5	$ 4,000,000	0.713	= $ 4,000,000 * 0.713 = $ 2,852,000
6	$ 4,000,000	0.666	= $ 4,000,000 * 0.666 = $ 2,664,000
7	$ 5,100,000	0.623	= $ 4,000,000 * 0.623 = $ 2,492,000

NPV = -$ 10,500,000.00 + $ 3,740,000 +  $ 3,492,000 + $ 3,264,000 +  $ 3,052,000 + $ 2,852,000

+  $ 2,664,000 + $ 2,492,000

NPV = $ 11,056,000.

If the discount rate is 7 percent, then​ Project's NPV =  $ 11,056,000.