Question
The Scampini Supplies Company recently purchased a new delivery truck. The new truck has an after-tax cost of $22,500, and it is expected to generate
The Scampini Supplies Company recently purchased a new delivery truck. The new truck has an after-tax cost of $22,500, and it is expected to generate after-tax cash flows of $6,000 per year. The truck has a 5-year expected life. The expected year-end abandonment values (after-tax salvage values) for the truck are given below. The company's WACC is 13%.
After-Tax | ||||||||||||||||||||||||||
Year | Annual After-Tax Cash Flow | Abandonment Value | ||||||||||||||||||||||||
0 | ($22,500) | - | ||||||||||||||||||||||||
1 | 6,000 | $17,500 | ||||||||||||||||||||||||
2 | 6,000 | 15,000 | ||||||||||||||||||||||||
3 | 6,000 | 12,000 | ||||||||||||||||||||||||
4 | 6,000 | 8,000 | ||||||||||||||||||||||||
5 | 6,000 | 0 |
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What is the truck's optimal economic life? Round your answer to the nearest whole number.
year(s)
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Would the introduction of abandonment values, in addition to operating cash flows, ever reduce the expected NPV and/or IRR of a project?
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