Question

FEZ (SITai to (Net present value calculation) Carson Trucking is considering whether to expand its regional service center in Mohab, UT. The expansion requires the exxpenditure of $9,000,000 on new service equipment and would generale 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 infiow totals $4,500,000. Calculate the projects NPV using a discount rate of 7 percent If the discount rate is 7 percent, then the projeect's NPV is S (Round to the nearest dollar.)

Answer 1

It is given that company has to make an initial cash outflow of $9,000,000. Annual net cash inflow is $3,500,000. There is an additional cash inflow of $1,000,000 as salvage value at the end of project.

The net present value is calculated below:

1-(1+i) -Cash outflow + Annual net cash inflow - Net present value = Salvage value (1+discount rate)" . $1,000,000 =-$9,000,000+$3,500,000x/1-(1+7%) 7% (1+7%) 0.333657 $1,000,000 =-$9,000,000+ $3,500, 10.07 1.50 =-$9,000,000+ $16,682,888.81+$666,342.22 = $8,349,231.03

Thus, the NPV for the project is $8,349,231.03.