Taggart Transcontinental is considering adding a trucking division to expand the

Question

Taggart Transcontinental is considering adding a trucking division to expand the coverage of its existing rail lines. The trucking division will cost $1,000,000 and is expected to generate free cash flows of $100,000 for each of the next five years. Taggart Transcontinental forecasts that future free cash flows after year 5 will grow at 2% per year, forever. Taggart Transcontinental's cost of capital is 10%.


The NPV for the trucking division is closest to:

Question 11 options:

200,000

212,550

312,500

170,750

250,000

A)

200,000

B)

212,550

C)

312,500

D)

170,750

E)

250,000

Explanation / Answer

NPV will be closest to $170750. Option D is correct.

#Cash Flows at Year 6 is calulated by the formula : Cash flow at year 5 (1+g)/r-g

= 100000(1+.02)/ .10-.02 = $1275000

Year Cash Flows PV Factor @ 10% PV 0 -1000000 1 -1000000 1 100000 0.9091 90909.09091 2 100000 0.8264 82644.6281 3 100000 0.7513 75131.48009 4 100000 0.6830 68301.34554 5 100000 0.6209 62092.13231 6 1275000 0.6209 791674.6869 NPV 170753.3638

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