Question

In: Accounting

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 ​$3,000,000 per year for each of the next 9 years. In year 9 the firm will also get back a cash flow equal to the salvage value of the​ equipment, which is valued at ​$1.2 million. ​Thus, in year 9 the investment cash inflow totals $4,200,000. Calculate the​ project's NPV using a discount rate of 10 percent.

If the discount rate is 10 ​percent, then the​ project's NPV is ​$

Solutions

Expert Solution

Correct Answer:

NPV = Present value of Cash Outflow – Present value of All the Cash Inflows

NPV @ 10 % = $ 7,285,988.59

A

B

C = B-A

Present value of Cash Outflow

Present value of Cash Inflow

Net present vale

$ $10,500,000

$ 17,785,988.59

$ 7,285,988.59

Working:

Present Value of All Cash Inflows

A

B

C (1+10%)^n

D = B/C

Years (n)

Cash flow

Discount rate 10%

Present value

1

$        30,00,000

1.1

$      27,27,272.73

2

$        30,00,000

1.21

$      24,79,338.84

3

$        30,00,000

1.331

$      22,53,944.40

4

$        30,00,000

1.4641

$      20,49,040.37

5

$        30,00,000

1.61051

$      18,62,763.97

6

$        30,00,000

1.771561

$      16,93,421.79

7

$        30,00,000

1.948717

$      15,39,474.35

8

$        30,00,000

2.143589

$      13,99,522.14

9

$        42,00,000

2.357948

$      17,81,210.00 **

Present Value of cash Inflows

$ 1,77,85,988.59

Working Note : Cash inflow for the year 9 is calculated by adding Annual cash Inflow of $ 3,000,000 and The salvage value of the service equipment of $ 1,200,000

$ 3,000,000 + $ 1, 200,000 = $ 4,200,000.

ekkarill92 answered 6 months ago
Next > < Previous

Related Solutions

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...
(Net present value calculation) Carson Trucking is considering whether to expand its regional service center in...
(Net present value calculation) Carson Trucking is considering whether to expand its regional service center in Mohab,UT. The expansion requires the expenditure of $9,000,000 on new service equipment and would generate annual net cash inflows from reduced costs of operations equal to $3,000,000 per year for each of the next 9 years. In year 9 the firm will also get back a cash flow equal to the salvage value of the equipment, which is valued at $0.9 million. Thus, in...
Carson Auto is currently considering whether or not to acquire a new machine for its manufacturing...
Carson Auto is currently considering whether or not to acquire a new machine for its manufacturing operation. The machine costs $700,000 and will be depreciated using straight-line depreciation toward a zero salvage value over the next five years. During the life of the machine, no new capital expenditures or investments in working capital will be required. The new handler is expected to save Carson $250,000 per year before taxes of 30%. Carson's CFO recently estimated the rm's opportunity cost of...
Guzman Trucking Company needs to acquire a new machine to expand its operations. The machine can...
Guzman Trucking Company needs to acquire a new machine to expand its operations. The machine can be leased or purchased. The firm is in the 40% tax bracket and its after-tax cost of debt is 5.4%. The terms of the lease and purchase are as follows: Lease: The leasing arrangement requires beginning of year payments of $16,900 over five years.   The lessor assumes all maintenance costs. Purchase: If Guzman purchases the machine, the cost of $80,000, will be financed with...
​(Constant dividend payout ratio policy​) The Blunt Trucking Company needs to expand its fleet by 70...
​(Constant dividend payout ratio policy​) The Blunt Trucking Company needs to expand its fleet by 70 percent to meet the demands of two major contracts it just received to transport military equipment from manufacturing facilities scattered across the United States to various military bases. The cost of the expansion is estimated to be $11million. Blunt maintains a 40 percent debt ratio and pays out 50 percent of its earnings in common stock dividends each year. a. If Blunt earns $4...
XYZ Steel Corporation is deciding whether to expand operations. The expansion would require purchasing a new...
XYZ Steel Corporation is deciding whether to expand operations. The expansion would require purchasing a new machine for $500,000, with additional $30,000 shipping and installation fees. The machine will be depreciated using a 7-year recovery period (use the percentages given in table 7-3 in the textbook). This project is expected to last 6 years, and the machine is expected to be sold for $200,000 at the end of year 6. In each of the six years of the project (years...
Profit center responsibility reporting for a service company Red Line Railroad Inc. has three regional divisions...
Profit center responsibility reporting for a service company Red Line Railroad Inc. has three regional divisions organized as profit centers. The chief executive officer (CEO) evaluates divisional performance, using operating income as a percent of revenues. The following quarterly income and expense accounts were provided from the trial balance as of December 31: Revenues—East $1,400,000 Revenues—West 2,000,000 Revenues—Central 3,200,000 Operating Expenses—East 800,000 Operating Expenses—West 1,350,000 Operating Expenses—Central 1,900,000 Corporate Expenses—Shareholder Relations 300,000 Corporate Expenses—Customer Support 320,000 Corporate Expenses—Legal 500,000 General...
Sovrano Café is considering a major expansion of its business. The details of the proposed expansion...
Sovrano Café is considering a major expansion of its business. The details of the proposed expansion project are summarized below: o The company will have to purchase $900,000 equipment, that require installation cost and transportation cost equal $100,000. o The sources of fund will be 250,000 loan from bank at interest 8% and the remaining will be from equity. o The company will pay interest equal to $120,000 each year. o The project has an economic life of 4 years....
Zimmer, a manufacturer of modular rooms, plans to expand its operations in Landshut, Germany. The expansion...
Zimmer, a manufacturer of modular rooms, plans to expand its operations in Landshut, Germany. The expansion will cost $14.5 million and is expected to generate annual net cash flows of €2.15 million for a period of 12 years and then the operation will be sold for €1 million (net of taxes). The cost of capital for the project is 14%. Using a spot exchange rate of $1.25/€ as the forecast FX rate for the euro for the term of the...
Carlson Corp. is considering whether to expand widget production. This would require the purchase of a...
Carlson Corp. is considering whether to expand widget production. This would require the purchase of a new widget-producing machine at a cost of $5,400,000. The machine would produce 450,000 widgets per year during its useful life of three years, and would be depreciated for tax purposes at a rate of $1,800,000 per year. The machine would have a salvage value of $500,000. Expanding widget production would also require the use of a building that could otherwise be leased for $500,000...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT