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?