The Laramy Company recently purchased a new delivery truck. The new truck cost $25,000, and it is expected to generate net after-tax operating cash flows, including depreciation, of $7,300 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%.

Year Annual Operating Cash Flow Salvage Value

0 ($25,000) $25,000

1 7,300 19,000

2 7,300 14,000

3 7,300 9,500

4 7,300 4,000

5 7,300 0

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

A.

The firm should operate the truck for 5 years, NPV = $2672.74

B.

The firm should operate the truck for 4 years, NPV = $8722.07

C.

The firm should operate the truck for 3 years, NPV = $2911.51

D.

The firm should operate the truck for 2 years, NPV = $4,192.06