Question
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OTR Trucking Company runs a fleet of long-haul trucks and has recently expanded into the Midwest,...
OTR Trucking Company runs a fleet of long-haul trucks and has recently expanded into the Midwest, where it has decided to build a maintenance facility. This project will require an initial cash outlay of $ 19.5million and will generate annual cash inflows of$3.8million per year for Years 1 through 3. In Year 4, the project will provide a net negative cash flow of $4.5million due to anticipated expansion of and repairs to the facility. During Years 5 through 10, the project will provide cash inflows of $ 2.4 million per year.
a. Calculate the project's NPV and IRR where the discount rate is 11.6 percent. Is the project a worthwhile investment based on these two measures? Why or why not?
b. Calculate the project's MIRR. Is the project a worthwhile investment based on this measure? Why or why not?
Solutions
Expert Solution
The net cash flows are
| Year | Initial cost | Annual cash flows | Expansion and repairs | Net cash flow |
| 0 | -19.5 | -19.5 | ||
| 1 | 3.8 | 3.8 | ||
| 2 | 3.8 | 3.8 | ||
| 3 | 3.8 | 3.8 | ||
| 4 | -4.5 | -4.5 | ||
| 5 | 2.4 | 2.4 | ||
| 6 | 2.4 | 2.4 | ||
| 7 | 2.4 | 2.4 | ||
| 8 | 2.4 | 2.4 | ||
| 9 | 2.4 | 2.4 | ||
| 10 | 2.4 | 2.4 |
a: NPV = -$6.78 million. IRR is 1.71%. Since NPV is negative and IRR is less than cost of capital, the project is not worthwhile.
b: MIRR = 7.65%. Since MIRR is less than cost of capital, the project is not worthwhile.
WORKINGS
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