Question

The Sorensen Supplies Company recently purchased a new delivery truck. The new truck costs $22,500, and...

The Sorensen Supplies Company recently purchased a new delivery truck. The new truck costs $22,500, and it is expected to generate after-tax cash flows, including depreciation, of $5,875 per year. The truck has a 5-year expected life. The expected year-end abandonment values (salvage values after tax adjustments) for the truck are given below. The company's WACC is 9%.


Year
Annual After-Tax
Cash Flow
Abandonment
Value
0 ($22,500)       -      
1 5,875 $17,000
2 5,875 15,000
3 5,875 9,000
4 5,875 4,750
5 5,875 0

a. What is the truck's optimal economic life?
   year(s)

b. Would the introduction of abandonment values, in addition to operating cash flows, ever reduce the expected NPV and/or IRR of a project?
-Select-YesNo

Homework Answers

Answer #1

a.

Decrease in value of Truck in year 1 is $5,500 ($22,500 - $17,000) and benefit earn is $5,875. So truck must operate in one year. In second year Decrease in value of Truck is $2,000 ($17,000 - $15,000) and benefit earn is $5,875. So truck must operate in second year.

Decrease in value of Truck in year 3 is $6,000 ($15,000 - $9,000) asd benefit earn is $5,875. in year 3 benefit earn is less than decrease in value of truck. So economic life of truck is 2 year.

b.

An introduction of abandonment values, in addition to operating cash flows, might reduce the economic life of an assets, so IRR or NPV of project will reduced from actaul NPV or IRR.

So, yes NPV or IRR might reduce.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
The Sorensen Supplies Company recently purchased a new delivery truck. The initial cash outflow for the...
The Sorensen Supplies Company recently purchased a new delivery truck. The initial cash outflow for the new truck is $20,500, and it is expected to generate after-tax cash flows of $5,425 per year. The truck has a 5-year expected life. The expected year-end abandonment values (after-tax salvage values) for the truck are given below. The company's WACC is 8%. Year Annual After-Tax Cash Flow Abandonment Value 0 ($20,500) - 1 5,425 $14,500 2 5,425 12,000 3 5,425 9,000 4 5,425...
The Sorensen Supplies Company recently purchased a new delivery truck. The initial cash outflow for the...
The Sorensen Supplies Company recently purchased a new delivery truck. The initial cash outflow for the new truck is $24,000, and it is expected to generate after-tax cash flows of $6,750 per year. The truck has a 5-year expected life. The expected year-end abandonment values (after-tax salvage values) for the truck are given below. The company's WACC is 9%. Year Annual After-Tax Cash Flow Abandonment Value 0 ($24,000) - 1 6,750 $20,000 2 6,750 15,500 3 6,750 12,500 4 6,750...
The Sorensen Supplies Company recently purchased a new delivery truck. The initial cash outflow for the...
The Sorensen Supplies Company recently purchased a new delivery truck. The initial cash outflow for the new truck is $24,000, and it is expected to generate after-tax cash flows of $6,575 per year. The truck has a 5-year expected life. The expected year-end abandonment values (after-tax salvage values) for the truck are given below. The company's WACC is 8%. Year Annual After-Tax Cash Flow Abandonment Value 0 ($24,000) - 1 6,575 $19,000 2 6,575 16,500 3 6,575 12,500 4 6,575...
The Scampini Supplies Company recently purchased a new delivery truck. The new truck cost $22,500, and...
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 10.5 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...
eBook Economic Life The Scampini Supplies Company recently purchased a new delivery truck. The new truck...
eBook 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 9.5 percent. Year Annual Operating Cash Flow Salvage Value 0 -$22,500 $22,500 1 6,250 17,500 2 6,250 14,000 3...
Economic Life The Scampini Supplies Company recently purchased a new delivery truck. The new truck cost...
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 11%. 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...
19. Your division is considering two investment projects, each of which requires an up-front expenditure of...
19. Your division is considering two investment projects, each of which requires an up-front expenditure of $24 million. You estimate that the cost of capital is 12% and that the investments will produce the following after-tax cash flows (in millions of dollars): Year Project A Project B 1 5 20 2 10 10 3 15 8 4 20 6 What is the regular payback period for each of the projects? Round your answers to two decimal places. Project A: _years...
Storm Delivery Company purchased a new delivery truck for $53,400 on April 1, 2016. The truck...
Storm Delivery Company purchased a new delivery truck for $53,400 on April 1, 2016. The truck is expected to have a service life of 5 years or 150,000 miles and a residual value of $4,320. The truck was driven 8,200 miles in 2016 and 11,800 miles in 2017. Storm computes depreciation to the nearest whole month. Required: Compute depreciation expense for 2016 and 2017 using the For interim computations, carry amounts out to two decimal places. Round your final answers...
Linkin Corporation is considering purchasing a new delivery truck. The truck has many advantages over the...
Linkin Corporation is considering purchasing a new delivery truck. The truck has many advantages over the company’s current truck (not the least of which is that it runs). The new truck would cost $ 55,040. Because of the increased capacity, reduced maintenance costs, and increased fuel economy, the new truck is expected to generate cost savings of $ 8,600. At the end of 8 years, the company will sell the truck for an estimated $ 28,900. Traditionally the company has...
On Time Delivery Inc. is considering the purchase of an additional delivery truck for $85,000 on...
On Time Delivery Inc. is considering the purchase of an additional delivery truck for $85,000 on January 1, 20Y4. The truck is expected to have a five-year life with an expected residual value of $8,000 at the end of five years. The expected additional revenues from the added delivery capacity are anticipated to be $70,000 per year for each of the next five years. A driver will cost $25,000 in 20Y4, with an expected annual salary increase of $1,000 for...