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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
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 here. The companys cost of capital is 10%.
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 |
- Should the firm operate the truck until the end of its 5-year physical life? If not, then what is its optimal economic life?
- Would the introduction of salvage values, in addition to operating cash flows, ever reduce the expected NPV and/or IRR of a project?
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