You are also considering another project that has a physical life of 3 yearsthat is, the machinery will be totally worn out after 3 years. However, if the project were terminated prior to the end of 3 years, the machinery would have a positive salvage value. Here are the projects estimated cash flows:

Using the 10% cost of capital, what is the projects NPV if it is operated for the full 3 years? Would the NPV change if the company planned to terminate the project at the end of Year 2? At the end of Year 1? What is the projects optimal (economic) life?

\begin{tabular}{r|r|r|} \hline Yr & \begin{tabular}{l} Initial investment \\ and operating cash \\ flows \end{tabular} & \begin{tabular}{l} End-of-Year Net \\ Salvage Value \end{tabular} \\ \hline 0 & 5,000 & 5,000 \\ \hline 1 & 2,100 & 3,100 \\ \hline 2 & 2,000 & 2,000 \\ \hline 3 & 1,750 & 0 \end{tabular} \begin{tabular}{r|r|r|} \hline Yr & \begin{tabular}{l} Initial investment \\ and operating cash \\ flows \end{tabular} & \begin{tabular}{l} End-of-Year Net \\ Salvage Value \end{tabular} \\ \hline 0 & 5,000 & 5,000 \\ \hline 1 & 2,100 & 3,100 \\ \hline 2 & 2,000 & 2,000 \\ \hline 3 & 1,750 & 0 \end{tabular}