The Diamond Freight Company has been offered a seven-year contract to haul munit

Question

The Diamond Freight Company has been offered a seven-year contract to haul munitions for the government. Because this contract would represent new business, the company would have to purchase several new heavy-duty trucks at a cost of $350,000 if the contract were accepted. Other data relating to the contract follow:


Annual net cash receipts (before taxes)
from the contract
$105,000
Salvage value of the trucks at termination
of the contract
$18,000

The trucks will have a useful life of seven years. To raise money to assist in the purchase of the new trucks, the company will sell several old, fully depreciated trucks for a total selling price of $16,000. The company requires a 16% after-tax return on all equipment purchases. The tax rate is 30%. For tax purposes, the company computes depreciation deductions assuming zero salvage value and using straight-line depreciation on the full cost of the trucks ($350,000). The new trucks would be depreciated over the seven year life.


Required:
(a) Compute the net present value of this investment opportunity. (Round to the nearest dollar amount. Omit the "$" sign in your response.)

Net present value $

(b) Compute the internal rate of return of this investment opportunity. (Round to two decimal places. Omit the "%" sign in your response.)

Internal rate of return %

Explanation / Answer

With the motors being replaced after four years, the trucks will have a useful life of seven years. To misc money to assist in the purchase of the new trucks, the company will sell several old, fully depreciated trucks for a total selling price of $16,000. The company requires a 16% after-tax return n all equipment purchases. The tax rate is 30%. For tax purposes, the company computes deprecation deductions assuming zero salvage value and using straight-line depreciation. The new trucks would be depreciated over five years

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