PLEASE USE EXCEL, AND SHOW FORMULAS

You are the CFO of the publicly traded trucking company Old Dominion Freight Line $($Nasdaq: ODFL$).$ It is

$2018$ and your company is considering opening a new freight facility in San Francisco. However, you are

concerned that the growing trade war between the US and China will reduce the demand for transporting

the large freight containers of US exporters and importers and that the tariffs imposed on aluminum and

steel will lower your revenues.

You predict that that the revenues from the new facility will be $$10$M or $$6$M next year and remain

constant for the next $8$ years, depending on whether the trade war continues or worsens. Your lobbyists

and economic forecasts suggest that both possibilities are equally likely. Assume that the discount rate

for the new facility is $8$ percent per year.

a$)$ What is the present value of the expected revenues of opening the facility?

Your forecast suggests that your operating costs will be $$3$M next year and grow by $4$ percent per year for

the next $8$ years. The costs and revenues have similar risk. Therefore, apply the same discount rate of $8$

percent year to the costs.

b$)$ What is the present value of the costs of opening the facility?

You decide that you will open the new facility. It will require a one$-$time fixed cost of $$15$M today, which

you will fund with cash on hand.

c$)$ What is the NPV of opening the new facility? Briefly explain whether the facility is a worthwhile

investment.

d$)$ Suppose that now you are now certain that the trade war will worsen. Would opening the facility

continue to be a worthwhile investment? Briefly use your answer to explain why the threat of a

trade war could lead to less domestic investment today.