Should the firm operate the truck until the end of its 5-year physical life; if not, what is the truck’s optimal economic life? Would the introduction of abandonment values, in addition to operating cash flows, ever reduce the expected NPV and/or IRR of a project? Explain.
ABANDONMENT OPTION The Scampini Supplies Company recently purchased a new delivery truck. The new truck costs $22,500, and it is expected to generate after-tax
Year Annual After-Tax Cash Flow Abandonment Value
0 ($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 0
- Should the firm operate the truck until the end of its 5-year physical life; if not, what is the truck’s optimal economic life?
- Would the introduction of abandonment values, in addition to operating cash flows, ever reduce the expected
NPV and/orIRR of a project? Explain.
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