Road King Trucks Case Analysis

1123 words 5 pages
Abstract
This paper is an analysis of Road King Trucks’ new project which is introducing a new product into its product line. I will decide whether run the project or not. Six issues will be discussed as follows 1) importance of energy cost; 2) project’s cash flows; 3) cost of capital; 4) choose an engine 5) evaluation 6) accept or reject.

We should accept the project because of the positive NPV and high IRR. We will gain $532 million in wealth which is a big money on the scale like this. The company has a bond rating of AA that makes the risk relatively low. So we should definitely say yes.
Issues
Importance of Energy Cost
Road King Trucks, Inc. is a truck manufacturing company. The new CEO Michael Livingston arranged a meeting
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Evaluation
The capital budgeting techniques are used in evaluating the project. The most important two factors are NPV and IRR. NPV determines whether a company can get profit running project through time. The project’s cash flows are discounted by WACC. The difference between the investment in year 0 and the total PV sum of future cash flows is NPV. If it is positive, we should accept the project. In this project it is $532 million. IRR is the rate that makes the NPV zero at the end of project life time. Which means if it’s higher than WACC, the project will be viable. I got an IRR of 12.41% greater than WACC, 8.49%. It fits the situation. Also we can find PI and payback. But they can’t present the whole situation as well as NPV and IRR do.
The company has a bond rating of AA. That will be a good thing if we run the project. Investors will bare a relatively low risk. And a overall beta of 1.15 also says the same.
Accept or Reject
If we run the project it will increase the company’s value by $ 532 million. We should accept the project because of the positive NPV and high IRR. Except the numbers, we should consider more than that. The government policies, environmental factors and future economy ought to be added in decision making.

Reference
[1] Gas prices pass $5 in some Southland areas. http://abclocal.go.com/
[2] Ehrhardt and Brigham, 2011. Financial Management: Theory and Practice, 13th Edition. South-Western Cengage Learning, OH
Table 2 D/E Ratio |

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