INTERMEDIATE FINAN.MGMT.(LL)-W/MINDTAP
INTERMEDIATE FINAN.MGMT.(LL)-W/MINDTAP
14th Edition
ISBN: 9780357533611
Author: Brigham
Publisher: CENGAGE L
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Chapter 12, Problem 22P

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 here. The company’s cost of capital is 10%.

Chapter 12, Problem 22P, The Scampini Supplies Company recently purchased a new delivery truck. The new truck cost $22,500,

  1. a. Should the firm operate the truck until the end of its 5-year physical life? If not, then what is its optimal economic life?
  2. b. Would the introduction of salvage values, in addition to operating cash flows, ever reduce the expected NPV and/or IRR of a project?
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Scenario one: Under what circumstances would it be appropriate for a firm to use different cost of capital for its different operating divisions? If the overall firm WACC was used as the hurdle rate for all divisions, would the riskier division or the more conservative divisions tend to get most of the investment projects? Why? If you were to try to estimate the appropriate cost of capital for different divisions, what problems might you encounter? What are two techniques you could use to develop a rough estimate for each division’s cost of capital?

Chapter 12 Solutions

INTERMEDIATE FINAN.MGMT.(LL)-W/MINDTAP

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