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The Scampini Supplies Company recently purchased a new delivery truck.
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%.Year Annual Operating Salvage Value Cash Flow________________________________________________0 (22,500) 22,5001 6,250 17,5002 6,250 14,0003 6,250 11,0004 6,250 5,0005 6,250 0a. 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 reduce the expected NPV and/or IRR of a project?
