Five years ago, a company was considering the purchase of 72 new diesel trucks that were 14.5696 more fuel-efficient than the ones the firm is now using. The company uses an average of 10 million gallons of diesel fuel per year at a price of $1.25 per gallon. If the company manages to save on fuel costs, it will save $1.875 million per year (1.5 million gallons at $1.25 per gallon). On this basis, fuel efficiency would save more money as the price of diesel fuel rises (at $1.35 per gallon, the firm would save $2.025 million in total if he buys the new trucks). Consider two possible forecasts, each of which has an equal chance of being realized. Under assumption #1, diesel prices will stay relatively low, under assumption =2 diesel prices will rise considerably. The 72 new trucks will cost the firm $5 million. Depreciation will be 24.84% in year 1. 38.39% in year 2. and 36.46% in year 3. The firm is in a 4096 income tax bracket and uses a 10% cost of capital for cash flow valuation purposes. Interest on debt is ignored. In addition, consider the following forecasts: Forecast for assumption #1 (low fuel prices): Year 1 Prob. (same for each year) 0.1 Year 3 $1.01 $0.81 $1.02 0.2 Price of Diesel Fuel per Gallon Year 2 $0.89 51.11 $1.23 $1.48 $1.58 $1.11 $1.32 0.3 $1.11 $1.3 0.2 0.2 $1.46 $1.4 $1.61 Forecast for assumption #2 (high fuel prices): Year 1 Year 3 $1.22 Price of Diesel Fuel per Gallon Year 2 $1.52 $1.7 $232 Prob. (same for each year) 0.1 0.3 0.4 0.2 $1.69 $2.01 $1.3 $1.81 $2.21 $2.52 $2.53 $2.83 Required: Calculate the percentage change on the basis that an increase would take place from the NPV under assumption #1 to the probability-weighted (expected) NPV. % Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places (for examples 28.3196). Five years ago, a company was considering the purchase of 72 new diesel trucks that were 14.5696 more fuel-efficient than the ones the firm is now using. The company uses an average of 10 million gallons of diesel fuel per year at a price of $1.25 per gallon. If the company manages to save on fuel costs, it will save $1.875 million per year (1.5 million gallons at $1.25 per gallon). On this basis, fuel efficiency would save more money as the price of diesel fuel rises (at $1.35 per gallon, the firm would save $2.025 million in total if he buys the new trucks). Consider two possible forecasts, each of which has an equal chance of being realized. Under assumption #1, diesel prices will stay relatively low, under assumption =2 diesel prices will rise considerably. The 72 new trucks will cost the firm $5 million. Depreciation will be 24.84% in year 1. 38.39% in year 2. and 36.46% in year 3. The firm is in a 4096 income tax bracket and uses a 10% cost of capital for cash flow valuation purposes. Interest on debt is ignored. In addition, consider the following forecasts: Forecast for assumption #1 (low fuel prices): Year 1 Prob. (same for each year) 0.1 Year 3 $1.01 $0.81 $1.02 0.2 Price of Diesel Fuel per Gallon Year 2 $0.89 51.11 $1.23 $1.48 $1.58 $1.11 $1.32 0.3 $1.11 $1.3 0.2 0.2 $1.46 $1.4 $1.61 Forecast for assumption #2 (high fuel prices): Year 1 Year 3 $1.22 Price of Diesel Fuel per Gallon Year 2 $1.52 $1.7 $232 Prob. (same for each year) 0.1 0.3 0.4 0.2 $1.69 $2.01 $1.3 $1.81 $2.21 $2.52 $2.53 $2.83 Required: Calculate the percentage change on the basis that an increase would take place from the NPV under assumption #1 to the probability-weighted (expected) NPV. % Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places (for examples 28.3196)
