Question

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

$3,500,000

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

$0.9

million.  Thus, in year

7

the investment cash inflow totals

$4,400,000.

Calculate the project's NPV using a discount rate of

6

percent.

Answer 1

Net present value = present value of cash inflows - present value of cash outflows

present value of cash inflows = 3,000,000 / ( 1 + 0.07)¹+ 3,000,000 / ( 1 + 0.07)²+ 3,000,000 / ( 1 + 0.07)³+ 3,000,000 / ( 1 + 0.07)⁴+ 3,000,000 / ( 1 + 0.07)⁵+ 3,000,000 / ( 1 + 0.07)⁶+ 4,100,000 / ( 1 + 0.07)¹

present value of cash inflows = 2,803,738.318 + 2,620,316.185 + 2,448,893.631 + 2,288,685.636 + 2,138,958.538 + 1,999,026.671 + 2,553,273.942

present value of cash inflows = 16,852,892.92

NPV = 16,852,892.92 - 10,500,000

NPV = $6,352,892.921

Answer 2

SOLUTION :

Discount rate, r = 6% = 0.06 

=> 1 + r = 1.06

We know that :

NPV 

= - Initial cost + PV of future cash flows discounted @ 6%.

= - 9000000 + 3500000(1.06^7 - 1)/(0.06 * 1.06^7) + 900000/1.06^7

= 11136886.45 ($) 

Investment cash inflow is not considered as it is not generated from the project.

So, NPV of the project is = 11,136,886 approx.  ($) (ANSWER)