The ABC Supplies Company recently purchased a new delivery truck. The new truck
ID: 2767396 • Letter: T
Question
The ABC Supplies Company recently purchased a new delivery truck. The new truck cost $25,000, and it is expected to generate the following new after-tax operating cash flows, including depreciation. The truck has a 4-year expected physical 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 ($25,000) $25,000
1 9,000 18,000
2 5,000 13,000
3 10,000 9,000
4 7,000 0
What is its optimal economic life?
Explanation / Answer
Solution:
-454
-1942
Present value 1589
-391
H/ence at the year end 3 the present value from the project is positive and hence the optimal economic life of the project is 3 years
Thank you.
Year CAsh flow Salvage value Net cash flow Discount 10% Cash flow present value 0 -25000 25000 0 1 0Related Questions
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