The project has the following cash flows and salvage values and cost of capital 8%: Year...

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.

Solutions

Expert Solution

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.

jeff jeffy answered 2 years ago

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