Haverford Industries recently purchased a new delivery truck. The new truck costs $56,250 and it is expected to generate after-tax operating cash flows, including depreciation, of $15,625 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 cost of capital is 11%. Should the firm operate the truck until the end of its 5-year physical life; if not, what is its optimal economic life? a. Yes; the firm should operate the truck for 5 years because the NPV of doing so is $3,500, and this maximizes the truck's NPV. b. Yes; the firm should operate the truck for 5 years because the NPV of doing so is $1,498, and this maximizes the truck's NPV. c. No; the firm should operate the truck for 3 years because the NPV of doing so is $2,041, and this maximizes the truck's NPV. d. No; the firm should operate the truck for only 1 year because the NPV of doing so is $2,759, and this maximizes the truck's NPV. e. No; the firm should operate the truck for 4 years because the NPV of doing so is $4,600, and this maximizes the truck's NPV.

Annual Operating Cash Flow ($56,250) 15,625 15,625 15,625 15,625 15,625 Abandonment Value Year 0 $43,750 35,000 27,500 12,500 4 0