Haulin' It Towing Company is considering adding more tow trucks to its fleet. The cost of the new trucks is $150,000. The project will utilize the risk adjusted discount, the firm has a beta of 1.3, the risk-free rate is 7%, and the return in the market is 15%. Should Haulin' It add the additional trucks if the expected increased revenues will be as follows? ? $$\begin{array} { | l | l | }
\hline \text { Years } & \text { Cash Flows } \
\hline \hline 1 & \$ 80,000 \
\hline \hline 2 & \$ 95,000 \
\hline \hline 3 & \$ 110,000 \
\hline
\end{array}$$
A) No, the NPV of the project is -$15,175.19.
B) Yes, the NPV of the project is $75,275.16.
C) No, the NPV of the project is -$9,765.12.
D) Yes, the NPV of the project is $55,050.92.

Question

Haulin' It Towing Company is considering adding more tow trucks to its fleet. The cost of the new trucks is $150,000. The project will utilize the risk adjusted discount, the firm has a beta of 1.3, the risk-free rate is 7%, and the return in the market is 15%. Should Haulin' It add the additional trucks if the expected increased revenues will be as follows? ? $$\begin{array} { | l | l | } 
\hline \text { Years } & \text { Cash Flows } \
\hline \hline 1 & \$ 80,000 \
\hline \hline 2 & \$ 95,000 \
\hline \hline 3 & \$ 110,000 \
\hline
\end{array}$$
A) No, the NPV of the project is -$15,175.19.
B) Yes, the NPV of the project is $75,275.16.
C) No, the NPV of the project is -$9,765.12.
D) Yes, the NPV of the project is $55,050.92.

Quizplus · Accepted Answer

First, calculate the required rate of return using the CAPM formula: Required return = Risk-free rate + Beta * (Market return - Risk-free rate) = 7% + 1.3 * (15% - 7%) = 17.4%. Then, calculate the NPV using the cash flows and the discount rate of 17.4%. NPV = -150,000 + 80,000 / (1 + 0.174)^1 + 95,000 / (1 + 0.174)^2 + 110,000 / (1 + 0.174)^3 = $55,050.92.

Haulin' It Towing Company Is Considering Adding More Tow Trucks