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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

jeff jeffy answered 1 year ago
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