Details
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 10 percent.
| Year | Annual Operating Cash Flow | Salvage Value |
| 0 | ($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 | 0 |
a. Should the firm operate the truck until the end of its 5-year physical life, or, if not, what is its optimal economic life?
b. Would the introduction of salvage values, in addition to operating cash flows, ever reducethe expected NPV and/or IRR of a project?
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