Question
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
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? -Select-YesNoItem 2
Why? The input in the box below will not be graded, but may be reviewed and considered by your instructor.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started