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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 ​$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 8 months ago
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