The Diamond Freight Company has been offered a seven-year contract to haul munit

Question

The Diamond Freight Company has been offered a seven-year contract to haul munitions for the government. Because this contract would represent new business, the company would have to purchase several new heavy-duty trucks at a cost of $350,000 if the contract were accepted. Other data relating to the contract follow The trucks will have a useful life of seven years. To raise money to assist in the purchase of the new trucks, the company will sell several old, fully depreciated trucks for a total selling price of $16,000. The company requires a 16% after-tax return on all equipment purchases. The tax rate is 30%. For tax purposes, the company computes depreciation deductions assuming zero salvage value and using straight-line depreciation on the full cost of the trucks ($350,000). The new trucks would be depreciated over the seven year life. Required: Compute the net present value of this investment opportunity. (Round to the nearest dollar amount. Omit the "$" sign in your response.) Net present value Compute the internal rate of return of this investment opportunity. (Round to two decimal places. Omit the "%" sign in your response.) Internal rate of return %

Explanation / Answer

71102.36

Schedule of Net Present Value Years 1 2 3 4 5 6 7 Total ($) Particulars Annual Net Cash Receipt Before Tax 105000 105000 105000 105000 105000 105000 105000 Depreciation 50000 50000 50000 50000 50000 50000 50000 Annual Net Profit Before Tax 55000 55000 55000 55000 55000 55000 55000 Tax 16500 16500 16500 16500 16500 16500 16500 Annual Net Profit After Tax 38500 38500 38500 38500 38500 38500 38500 Depreciation 50000 50000 50000 50000 50000 50000 50000 Annual Net Acsh Receipt after tax 88500 88500 88500 88500 88500 88500 88500 Discount Factor @ 16% 0.862 0.743 0.641 0.552 0.476 0.410 0.354 Present Value of Cash Inflow 76293.1 65769.92 56698.2 48877.76 42136 36324.14 31313.91 357413 Present Value of salvage 180000 * 0.354 63689.32 Initial Investment 350000 Net Present Value

71102.36

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