A logistics company is considering expansion. The planned expansion would cost $12,000,000
(the cost of new delivery vehicles required) and would generate additional revenue of
approximately $10,000,000 in year one. The revenue would grow each year with inflation of 2%.
There are, however, some costs associated with the expansion. Assume salaries and benefits will
start at 36% of sales and decrease 20 basis points each year. Fuel expenses will start at 4.5% of
revenue but increase by 50 basis points each year. Other expenses will be approximately 30%
each year, with a 10-basis point improvement annually. The company currently has a tax rate of
21%, and you can assume that the tax rate will remain constant. To keep the new delivery center
open, working capital of 8% of next year's sales will be required.
Please create a model that shows NPV (using tax depreciation) and EPS (using book
depreciation) for the next 7 years. Assume the company uses straight-line depreciation for book
(EPS) purposes and uses the 7-year MACRS tables for the NPV analysis. The company currently
has a 12% WACC, and there are 800,000 shares outstanding.
