Question
You are also considering another project that has a physical life of 3 years; that is, the machinery will be totally worn out after 3
You are also considering another project that has a physical life of 3 years; that 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: (Please show work and Excel formulas for calculations)
Year Initial Investment and Operating Cash Flows End-of-YearNet Salvage Value
0 -5,000 $5000
1 2100 3100
2 2,000 2,000
3 1,750 0
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 theend of Year 2? At the end of Year 1? What is the projects optimal (economic) life?
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