The Scampini Supplies Company recently purchased a new delivery truck. The new truck costs $22,500, and it is expected to generate after-tax cash flows, including depreciation, of $6,250 per year. The truck has a 5-year expected life. The expected year-end abandonment values (salvage values after tax adjustments) for the truck are given below. The company's WACC is 10%.
| Year |
Annual After-Tax Cash
Flow |
Abandonment Value |
|
| 0 |
$-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. What is the truck's optimal economic life?
b. Would the introduction of abandonment values, in addition to operating cash flows, ever reduce the expected NPV and/or IRR of a project?