Question

Burlington Motor Carriers, a trucking company, is considering the installation of a two-way mobile satellite messaging service on its 2,000 trucks. From tests done last year on 120 trucks, the company found that satellite messaging could cut 60% of its $5 million bill for long-distance communications with truck drivers. More importantly, the drivers who used this system reduced the number of "deadhead" miles-those driven without paying loads-by 0.5%.Applying that improvement to all 230 million miles covered by the Burlington fleet each year would produce an extra $1.25 million in savings. Equipping all 2,000 trucks with the satellite hookup will require an investment of $8 million and the construction of a message-relaying system costing $2 million. The equipment and onboard devices will have a service life of eight years and negligible salvage value; they will be depreciated under the five-yea MACRS class. Burlington's marginal tax rate is about 38%, and its required mini-

mum attractive rate of return is 18%.
(a) Determine the annual net cash flows from the project.

Answer 1

The annual net cash flows from the project are $0.63 million.

Step-by-step explanation:

To determine the annual net cash flows from the project, we need to calculate the initial investment, annual savings, and salvage value. First, let's calculate the initial investment:

Initial investment = Cost of equipping trucks + Cost of message-relaying system = $8 million + $2 million = $10 million

Next, let's calculate the annual savings:

Annual savings = Savings from reduced communication bill + Savings from reduced deadhead miles = ($5 million * 60%) + ($1.25 million) = $3 million + $1.25 million = $4.25 million

Finally, let's calculate the salvage value:

Salvage value = 0 (given that it has negligible salvage value)

Net cash flows = Annual savings - Depreciation - Taxes = $4.25 million - Depreciation - ($4.25 million * 38%)

Since the depreciation is spread over 5 years, the annual depreciation is ($10 million / 5 years = $2 million). Substituting this value in the equation, we get:

Net cash flows = $4.25 million - $2 million - ($4.25 million * 38%) = $4.25 million - $2 million - $1.62 million = $0.63 million