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.
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