Abandonment option

The Sorensen Supplies Company recently purchased a new delivery truck. The new truck costs $22,500, and it is expected to generate after-tax cash flows, including depreciation, of $5,875 per year. The truck has a 5-year expected life. The expected year-end abandonment values (salvage values after tax adjustments) for the truck are given below. The company's WACC is 9%.

Year	Annual After-Tax Cash Flow	Abandonment Value
0	-$22,500	-
1	5,875	$17,000
2	5,875	15,000
3	5,875	9,000
4	5,875	4,750
5	5,875	0

a. What is the truck's optimal economic life? year(s)

b. Would the introduction of abandonment values, in addition to operating cash flows, ever reduce the expected NPV and/or IRR of a project?

Why? The input in the box below will not be graded, but may be reviewed and considered by your instructor.