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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.

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