Carson Trucking is considering whether to expand its regional service center in

Question

Carson Trucking is considering whether to expand its regional service center in Mohab, UT. The expansion requires the expenditure of $9,500,000 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 6 years. In year 6 the firm will also get back a cash flow equal to the salvage value of the equipment which is valued at $1 million. Thus, in year 6 the investment cash inflow totals $4,500,000. Calculate the project's NPV using a discount rate of 8%.

Explanation / Answer

P = -9,500,000 A = 3,500,000 N = 6 F = 3,500,000 + 9,500,000 = 13000000 NPV = -9,500,000 + 3,500,000 (P/A,i=8%,N=6) + 13000,000 (P/F,i=8%,N=6) NPV = -9,500,000 + 3,500,000 (5.0330) + 3,500,000 (0.5019) NPV = 4,338,914.1

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