Question

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 6,500
5 6,750 0
  1. What is the truck's optimal economic life? Round your answer to the nearest whole number.

       year(s)=

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

    -Select-Yes or No

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