In: Finance
The project has the following cash flows and salvage values and cost of capital 8%:
Year |
Cash flows |
Salvage |
0 |
-5000 |
4000 |
1 |
2500 |
3500 |
2 |
3200 |
1800 |
3 |
1600 |
900 |
4 |
1000 |
0 |
What are the physical life and the economic life for this project?
A. Physical life of this project is 3 years with economic life of 4
years.
B. Physical life of this project is 4 years with economic life of 1
year.
C. Physical life of this project is 4 years with economic life of 2
years.
D. Physical life of this project is 4 years with economic life of 4
years.
E. Physical life of this project is 4 years with economic life of 3
years.
Economic life is the life during which an asset provides some value to the owner while the physical life is the life over which the asset is in use. In the above example, the asset provides some economic value to the owner upto the end of Years 3 when its salvage value is 900 while physical life of asset is 4 years.
Answer is E. Physical life of this project is 4 years with economic life of 3 years.