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TR Trucking Company runs a fleet of​ long-haul trucks and has recently expanded into the​ Midwest, where it has decided to build a maintenance facility. This project will require an initial cash outlay of $ 18 million and will generate annual cash inflows of ​$4.8 million per year for Years 1 through 3. In Year​ 4, the project will provide a net negative cash flow of ​$4.8 million due to anticipated expansion of and repairs to the facility. During Years 5 through​ 10, the project will provide cash inflows of $ 1.4 million per year.

a. Calculate the​ project's NPV and IRR where the discount rate is 11.2 percent. Is the project a worthwhile investment based on these two​ measures? Why or why​ not?

b. Calculate the​ project's MIRR. Is the project a worthwhile investment based on this​ measure? Why or why​ not?

Respuesta :

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Answer:

a. Calculate the​ project's NPV and IRR where the discount rate is 11.2 percent. Is the project a worthwhile investment based on these two​ measures? Why or why​ not?

  • NPV = -$4.5 million
  • IRR = 2.97%

The project should be rejected because the NPV is negative.

b. Calculate the​ project's MIRR. Is the project a worthwhile investment based on this​ measure? Why or why​ not?

  • MIRR = 8.57%

The project should be rejected because the NPV is negative. The IRR or MIRR do not matter at all if the NPV is negative.

Explanation:

the net cash flows are:

  • year 0 = -$18 million
  • year 1 = $4.8 million
  • year 2 = $4.8 million
  • year 3 = $4.8 million
  • year 4 = -$4.8 million
  • year 5 = $1.4 million
  • year 6 = $1.4 million
  • year 7 = $1.4 million
  • year 8 = $1.4 million
  • year 9 = $1.4 million
  • year 10 = $1.4 million

Using an excel spreadsheet we can determine the project's NPV and IRR:

NPV = $13.5 million - $18 million = -$4.5 million

IRR = 2.97%

We can also calculate MIRR using excel. We can use 11,2% finance rate and reinvestment rate:

MIRR = 8.57%

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