Question

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			4,000
5	5,425			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-YesNoItem 2

Answer 1