THE SCAMPINI SUPPLIES COMPANY RECENTLY PURCHASED A NEW DELIVERY TRUCK.

THE SCAMPINI SUPPLIES COMPANY RECENTLY PURCHASED A NEW DELIVERY TRUCK..

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?

THE SCAMPINI SUPPLIES COMPANY RECENTLY PURCHASED A NEW DELIVERY TRUCK.

 
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