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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
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 million and will generate annual cash inflows of $4.2 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 facility. During Years 5 through 10, the project will povide cash Inflows of $2.2 million per year.
a) Calculate the project, NPV and IRR where the disoount rate is 11.6 percent. Is the project a worthwhile investment based on these two measures, Why or why not.
b) Calculate the projects MIRR. Is the project a worthwhile investment based on this measure, Why or why not.
Expert Solution
a) NPV of the project = -$8,039,177.88 Or -$8.04 million
IRR of the project = 0.00%
Since, the NPV is negative and the IRR is lower than the cost of capital. So, the project is not a worthwhile investment.
b) MIRR of the project = 7.16%
The project is not worthwhile investment because the MIRR is lower than the cost of capital.
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