l. You are also considering another project that has a physical life of 3 years; that is, the machinery will be totally worn out after 3 years. However, if the project were terminated prior to the end of 3 years, the machinery would have a positive salvage value.

Here are the project’s estimated cash flows:

Year Initial Investment and Operating Cash Flows End-of-Year Net Salvage Value 0 −$5,000 $5,000 1 2,100 3,100 2 2,000 2,000 3 1,750 0 Using the 10% cost of capital, what is the project’s NPV if it is operated for the full 3 years? Would the NPV change if the company planned to terminate the project at the end of Year 2? At the end of Year 1? What is the project’s optimal (economic) life?

m. After examining all the potential projects, you discover that there are many more projects this year with positive NPVs than in a normal year. What two problems might this extra-large capital budget cause?