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Carson Trucking is considering whether to expand its regional service center in​ Mohab, UT. The expansion...

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 $ ___

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Expert Solution

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.

milcah answered 5 months ago
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