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 7 percent. Year Annual Operating Cash Flow Salvage Value $22,500 $22,500 6,250 17,500 6,250 14,000 3 6,250 11,000 4 6,250 5,000 6,250 a. What is the optimal number of years to operate the truck? Do not round intermediate calculations. Round your answers to the nearest whole number. years b. Would the introduction of salvage values, in addition to operating cash flows, ever reduce the expected NPV and/or IRR of a project? I. Yes. Salvage possibilities could only lower NPV and IRR. II. Salvage possibilities would have no effect on NPV and IRR. III. No. Salvage possibilities could only raise NPV and IRR.
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 7 percent. Year Annual Operating Cash Flow Salvage Value $22,500 $22,500 6,250 17,500 6,250 14,000 3 6,250 11,000 4 6,250 5,000 6,250 a. What is the optimal number of years to operate the truck? Do not round intermediate calculations. Round your answers to the nearest whole number. years b. Would the introduction of salvage values, in addition to operating cash flows, ever reduce the expected NPV and/or IRR of a project? I. Yes. Salvage possibilities could only lower NPV and IRR. II. Salvage possibilities would have no effect on NPV and IRR. III. No. Salvage possibilities could only raise NPV and IRR.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Economic Life
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 7 percent.
Annual Operating Cash Flow Salvage Value
ITT
Year
-$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
a. What is the optimal number of years to operate the truck? Do not round intermediate calculations. Round your answers to the nearest whole number.
years
b. Would the introduction of salvage values, in addition to operating cash flows, ever reduce the expected NPV and/or IRR of a project?
I. Yes. Salvage possibilities could only lower NPV and IRR.
II. Salvage possibilities would have no effect on NPV and IRR.
III. No. Salvage possibilities could only raise NPV and IRR.
-Select- v
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