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Five years ago, a company was considering the purchase of 61 new diesel trucks that were 15.13% more fuel-efficient than the ones the firm is

Five years ago, a company was considering the purchase of 61 new diesel trucks that were 15.13% 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 61 new trucks will cost the firm $5 million. Depreciation will be 25.2% in year 1, 38.24% in year 2, and 36.96% in year 3. The firm is in a 39% income tax bracket and uses a 11% 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):

Price of Diesel Fuel per Gallon

Prob. (same for each year)

Year 1

Year 2

Year 3

0.1

$0.8

$0.9

$1.03

0.2

$0.99

$1.1

$1.13

0.3

$1.11

$1.23

$1.3

0.2

$1.3

$1.48

$1.48

0.2

$1.4

$1.56

$1.61

Forecast for assumption #2 (high fuel prices):

Price of Diesel Fuel per Gallon

Prob. (same for each year)

Year 1

Year 2

Year 3

0.1

$1.23

$1.51

$1.71

0.3

$1.31

$1.69

$1.99

0.4

$1.81

$2.33

$2.53

0.2

$2.21

$2.52

$2.81

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.

Answer% Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places (for example: 28.31%).

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