The Scampini Supplies Company recently purchased a new delivery truck. The new t

Question

The Scampini Supplies Company recently purchased a new delivery truck. The new truck cost $20,000, and it is expected to generate net after-tax operating cash flows, including depreciation, of $7,000 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 12%. What is ithis project's optimal economic life?

Year Annual Operating Cash Flow Salvage Value 0 ($20,000) $20,000 1 7,000 16,000 2 7,000 14,000 3 7,000 12,000 4 7,000 8,000 5 7,000 0

Explanation / Answer

4 Years Year Annual Operating Cash Flow Salvage Value Change in Salvage Value Annual Cash Flow less change in salvage value 0 ($20,000) $20,000 1 7,000 16,000 $4,000                 3,000.00 2 7,000 14,000 $2,000                 5,000.00 3 7,000 12,000 $2,000                 5,000.00 4 7,000 8,000 $4,000                 3,000.00 5 7,000 0 $8,000               (1,000.00) Since in the 5 th year decline in salvage value is more than cash flows its better to dispose the asset at end of 4th Year

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