The Scampini Supplies Company recently purchased a new delivery truck.The new truck costs $20,000, and it is expected to generate after-tax cash flows, including depreciation, of $20,000 per year. The truck has a 5-year expected life.The expected year-end abandonment value (salvage values after tax adjustments) for the truck are given here. The companys WACC is 10 percent.

Year Annual After-Tax Cash Flow Abandonment Value

0 ($20,000) ---

1 20,000 $15,000

2 20,000 10,000

3 20,000 5,000

4 20,000 0

5 20,000 0

1. Should the firm operate the truck until the end of its 5-year physical life; if not, what is the optimal economic life?
2. Would the introduction of abandonment value, in addition to operating cash flows, ever reduce the expected NPV and/or IRR of a project? Explain