Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
The Scampini Supplies Company recently purchased a new
delivery truck. The new truck costs $22,500, and it is expected to generate after-tax cash
flows, including depreciation, of $6,250 per year. The truck has a 5-year expected life. The
expected year-end abandonment values (salvage values after tax adjustments) for the truck
are given here. The company’s WACC is 10%.
a. Should the firm operate the truck until the end of its 5-year physical life; if not, what is
the truck’s optimal economic life?
b. Would the introduction of abandonment values, in addition to operating cash flows,
ever reduce the expected
Transcribed Image Text:Year
Annual After-Tax Cash Flow
Abandonment Value
($22,500)
6,250
$17,500
14,000
11,000
2
6,250
3
6,250
6,250
5,000
6,250
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