Firm is considering purchasing new line of delivery vehicles

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Reference no: EM131584387

Your firm is considering purchasing a new line of delivery vehicles to expand its market. The vehicles will cost $15 mln plus an additional $1.5 mln to outfit with your firm’s delivery technology. The trucks have a useful life of 8 years and an estimated salvage value of $1 mln.

After a $0.4 mln market study, you estimate that you’ll be able to generate cash inflows of $5 mln a year. However, cash outflows related to increased salaries and related delivery costs will be $1.5 mln annually and you will need to increase warehouse inventory levels from $25 mln to $30 mln. In addition, entering the new market will cannibalize sales in your existing markets, causing their cash inflows to drop by $0.5 mln annually.

Assume that the CCA rate for automobiles is 25%, your firm’s WACC is 9% and your marginal tax rate is 15%. What is the NPV of the expansion?

Reference no: EM131584387

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