Problem 10-22 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 below. The company's cost of capital is 10.5 percent.

Year	Annual Operating Cash Flow		Salvage Value
0	-$22,500		$22,500
1	6,250		17,500
2	6,250		14,000
3	6,250		11,000
4	6,250		5,000
5	6,250		0

What is the optimal number of years to operate the truck?