Economic Life

The Scampini Supplies Company recently purchased a new delivery truck. The new truck cost $$22,500,$ and it is expected to generate net after$-$tax operating cash flows, including depreciation, of $$6,250$ per year. The truck has a $5-$year expected life. The expected salvage values after tax adjustments for the truck are given here. The company$$s cost of capital is $10\%.$

Year Annual Operating Cash Flow Salvaage Value

$0-$$$22,500$ $$22,500$

$16,25017,500$

$26,25014,500$

$36,25011,000$

$46,2505,000$

$56,2500$

a$.$ Should the firm operate the truck until the end of its $5-$year physical life? If not, then what is its optimal economic life?

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