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 nonpaying loads-by 0.5%. Applying that improvement to all 230 million miles covered by the Burlington fleet each year would produce an extra $1.25 million savings.
Equipping all 2,000 trucks with the satellite hookup will require an investment of $8 million and the construction of a message-relaying system costing $2 million. 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 a sensitivity analysis on the project's data, varying savings in telephone bills and savings in deadhead miles. Assume that each of these variables can deviate from its base-case expected value by ±10%, ±20%, and ±30%.
(c) Prepare sensitivity diagrams and interpret the results.