Problem 10-22 Economic Life The Scampini Supplies Company recently purchased a n

Question

Problem 10-22
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 10.5 percent.

What is the optimal number of years to operate the truck?

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 6,250 5,000 5 6,250 0

Explanation / Answer

Ans-

1249.1

-259

893.75

optimal number of years to operate the truck is for only 1 year because NPV is high($1249.1)

1st year Year Cash flow Salvage value Total Cash flow Df @10.5% PV($) 1 6250 17500 23750 0.905 23749.1 Total PV 23749.1 Total Investement 22500 NPV

1249.1

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