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OTR 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 $ 21.5 million and will generate annual cash inflows of ​$4.4 million per year for Years 1 through 3. In Year​ 4, the project will provide a net negative cash flow of ​$5.4 million due to anticipated expansion of and repairs to the facility. During Years 5 through​ 10, the project will provide cash inflows of $ 2.3 million per year.a. Calculate the project's NPV and IRR where the discount rate is 11 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? a. The project's NPV where the discount rate is 11% is $____ million. (Round to two decimal places.)

Respuesta :

jepessoa

Answer:

year                 cash flows

0                    -$21,500,000

1                        $4,400,000

2                       $4,400,000

3                       $4,400,000

4                      -$5,400,000      

5                       $2,300,000

6                       $2,300,000

7                       $2,300,000

8                       $2,300,000

9                       $2,300,000

10                      $2,300,000

I used an excel spreadsheet to calculate the project's NPV, IRR and MIRR.

a. Calculate the project's NPV and IRR where the discount rate is 11 percent. Is the project a worthwhile investment based on these two measures? Why or why not?

  • NPV = -$7,895,194
  • IRR = 0.09%
  • Since the NPV is negative, the company should not invest in this project.

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

Since we are not given any financing rate nor WACC, we must assume that the company's discount rate is equal to its financing rate and WACC:

  • MIRR = 6.88%
  • Since the MIRR is too low (lower than the company's WACC), the company should not invest in this project.

When you calculate MIRR, you must assume that the company will invest the cash inflows at their normal WACC while the outflows are financed at a different rate.            

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