(Calculating MIRR) OTR Trucking Company runs a fleet of long-haul trucks and has
ID: 1172207 • Letter: #
Question
(Calculating MIRR) 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 $18 million and will generate annual cash inflows of $3.5 million per year for Years 1 through 3. In Year 4, the project will provide a net negative cash flow of $48 million due to anticipated expansion of and repairs to the facility. During Years 5 through 10, the project will provide cash inflows of $1.8 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 1 1% is $ million. (Round to two decimal places )Explanation / Answer
Ans a) Below table will provide the NPV of project.
To find NPV we will use discounting rate of 11% so the cashflow in year 0 will be equal to -18 Million/(1+ r) ^ n
where r is discounting rate and n is the respective year.
NPV = -$7.59 Million
IRR = -2%
Since NPV is negative and IRR is less than discount rate we will not pursue this investment opportunity.
Ans b)
MIRR is 6% but it is still less than discount rate that's why we will not pursue this investment opportunity.
0 1 2 3 4 5 6 7 8 9 10 Cashflow -18.00 3.50 3.50 3.50 -4.80 1.80 1.80 1.80 1.80 1.80 1.80 Present Value -18.00 3.15 2.84 2.56 -3.16 1.07 0.96 0.87 0.78 0.70 0.63 NPV -7.59 IRR -2%Related Questions
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