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The Sorensen Supplies Company recently purchased a new delivery truck. The initial cash outflow for the new truck is $22,500, and it is expected to
The Sorensen Supplies Company recently purchased a new delivery truck. The initial cash outflow for the new truck is $22,500, and it is expected to generate after-tax cash flows of $7,200 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 9%.
Year | Annual After-Tax Cash Flow | Abandonment Value | |||
0 | ($22,500) | - | |||
1 | 7,200 | $16,500 | |||
2 | 7,200 | 13,000 | |||
3 | 7,200 | 11,000 | |||
4 | 7,200 | 6,000 | |||
5 | 7,200 | 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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