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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

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 9 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

  1. What is the optimal number of years to operate the truck?
  2. Would the introduction of salvage values, in addition to operating cash flows, ever reduce the expected NPV and/or IRR of a project? -Select-IIIIIIItem 2 I. No. Salvage possibilities could only raise NPV and IRR. II. Yes. Salvage possibilities could only lower NPV and IRR. III. Salvage possibilities would have no effect on NPV and IRR.

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