Question

In: Finance

The Sorensen Supplies Company recently purchased a new delivery truck. The initial cash outflow for the...

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

Solutions

Expert Solution

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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