The scampini supplies company recently purchased a new delivery truck. – Essaylink

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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.

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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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