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(Calculating MIRR) OTR Trucking Company runs a fleet of​ long-haul trucks and has recently expanded into...

(Calculating MIRR) 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 $ 18.5 million and will generate annual cash inflows of ​$4.8 million per year for Years 1 through 3. In Year​ 4, the project will provide a net negative cash flow of ​$5.5 million due to anticipated expansion of and repairs to the facility. During Years 5 through​ 10, the project will provide cash inflows of $ 1.8 million per year. a. Calculate the​ project's NPV and IRR where the discount rate is 11.4 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 flows
0 -18.5 -18.5
1 4.8 4.8
2 4.8 4.8
3 4.8 4.8
4 -5.5 -5.5
5 1.8 1.8
6 1.8 1.8
7 1.8 1.8
8 1.8 1.8
9 1.8 1.8
10 1.8 1.8

Accordingly as per workings, the NPV = -$5.53 million and IRR=1.45%. Since NPV is negative and IRR<Cost of capital, the project is not worthwhile.

MIRR is 8.23% which is less than the cost of capital. So again the project is not worthwhile.

WORKINGS

jeff jeffy answered 11 months ago
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