Burlington Motor Carriers, a trucking company, is considering installing a two-way mobile satellite messaging service on its 2,000 trucks. On the basis of tests done last year on 120 trucks, the company found that satellite messaging could cut 60% from its $5 million bill for long-distance communication with truck drivers. More importantly, the drivers reduced the number of “deadhead” miles those driven with non paying loads by 0.5%.Applying that improvement to all 230 million miles coverd by the Burlington fleet each year would produce an extra $1.25 million savings.
Equipping all 2,000 with the satellite hookup will require an investment of $8 million and the construction of a message-relaying system costing $2million. The equipment and onboard devices will have a service life of eight years and negligible salvage value; they will be depreciated under the five-year MACRS class. Burlington’s marginal tax rate is about 38%, and its required minimum attractive rate of return is 18%
(a) Determine the annual net cash flows from the project.
(b) Perform sensitivity analysis on the project’s data, varying savings in telephone bills and savings in deadhead miles. Assume that each of these variable can deviate from its base-case expected value +-10%, +-20% and +-30%
(c) Prepare sensitivity diagrams and interpret the results.