Middlefield Motors is considering project X, which would involve opening a new d

Question

Middlefield Motors is considering project X, which would involve opening a new dealership that would sell trucks only. The project would require an initial investment of 10,599 dollars today and is expected to produce annual cash flows of 1,441 dollars each year forever with the first annual cash flow expected in 1 year. What is the NPV of project X, based on the information in this paragraph and the following table and applying the pure play approach to determining a project’s cost of capital?

Firm Line of business WACC Sells cars, trucks, and vans Sells cars 14.96 percent Toledo Trucks Sells trucks 12.29 percent Vehicle Depot Sells cars, trucks, and vans 8.55 percent

Explanation / Answer

NPV = Present value of cash inflows - Present value of cash outflows

Present value of cash inflows = Cash Inflows / WACC

Firm Line of business WACC Cash Flows Present value of cash Inflows Present value of cash outflows NPV Sells cars, trucks, and vans Sells cars 14.96%                      1,441                     9,632                    10,599        (967) Toledo Trucks Sells trucks 12.29%                      1,441                   11,725                    10,599       1,126 Vehicle Depot Sells cars, trucks, and vans 8.55%                      1,441                   16,854                    10,599       6,255

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