Question

(Net present value calculation) 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 $4,000,000 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 $4,900,000. Calculate the project's NPV using a discount rate of 10 percent If the discount rate is 10 percent, then the project's NPV is $ ___ (Round to the nearest dollar.)

Answer 1

To calculate the NPV for Carson Trucking's expansion project, we discount future cash inflows at a rate of 10% and subtract the initial investment, using the formula for present value of a future cash flow for each year.

Step-by-step explanation:

To calculate the Net Present Value (NPV) for Carson Trucking's expansion project, we need to discount all future cash flows back to their present value and subtract the initial investment. Using the given discount rate of 10%, we will calculate the present value of each of the annual cash inflows of $4,000,000 for the first 6 years. In the seventh year, the cash inflow will be $4,900,000, including the salvage value of the equipment.

The formula for the present value of a future cash flow is:

Present Value = Future Cash Flow / (1 + r)^n

Where 'r' is the discount rate, and 'n' is the number of periods until the cash flow occurs. We apply this formula for each year and sum up all present values, then subtract the initial investment cost of $9,500,000 to find the project's NPV.