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 below. The company"s cost of capital is 10 percent.
|
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 |
a. Should the firm operate the truck until the end of its 5-year physical life, or, if not, what is its optimal economic life?
b. Would the introduction of salvage values, in addition to operating cash flows, ever reducethe expected NPV and/or IRR of a project?
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