Question

The Sorensen Supplies Company recently purchased a new delivery truck. The initial cash outflow for the new truck is $25,000, and it is expected to generate after-tax cash flows of $6,200 per year. The truck has a 5-year expected life. The expected year-end abandonment values (after-tax salvage values) for the truck are given below. The company's WACC is 11%.

Year	Annual After-Tax Cash Flow		Abandonment Value
0	($25,000)			-
1	6,200			$21,000
2	6,200			18,500
3	6,200			16,500
4	6,200			11,500
5	6,200			0

1. What is the truck's optimal economic life? Round your answer to the nearest whole number.

      year(s) =

2. Would the introduction of abandonment values, in addition to operating cash flows, ever reduce the expected NPV and/or IRR of a project?

   -Select-Yes or No

Answer 1

A)	Maximum NPV at Years 3	So Optimum Economic Life is 3 years
B)	No Because introduction of abandonment values also Increases the Value of Cashflows

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