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Question 3 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 raise your production costs. Your forecasting model suggests that the revenues from the new facility will be $10M or $6M next year and remain constant for the next 8 years. Both values 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 $3M 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 $15M 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

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