Whether the firm operate the truck until the end of its 5-years physical life and if not, determine its optimal economic life.

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Answer 1

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Chapter 10, Problem 22P

a)

Summary Introduction

To determine: Whether the firm operate the truck until the end of its 5-years physical life and if not, determine its optimal economic life.

b)

Summary Introduction

To determine: Whether the introduction of salvage values, in addition to operating cash flows, ever decrease the expected NPV and/or IRR of a project.

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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 8%. Year 0 1 2 3 4 5 Annual Operating Cash Flow Salvage Value -$22,500 6,250 6,250 6,250 6,250 6,250 a. What is the optimal number of years to operate the truck? Do not round intermediate calculations. Round your answers to the nearest whole number. years -Select- ✓ b. Would the introduction of salvage values, in addition to operating cash flows, ever reduce the expected NPV and/or IRR of a project? I. No. Salvage possibilities could only raise NPV and IRR. II. Yes. Salvage possibilities could only lower NPV and IRR. III. Salvage possibilities would have no effect on NPV and IRR. $22,500 17,500 14,000 11,000 5,000 0

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%. Year Annual Operating Salvage ValueCash Flow________________________________________________ 0 (22,500) 22,5001 6,250 17,5002 6,250 14,0003 6,250 11,0004 6,250 5,0005 6,250 0 a. Should the firm operate the truck until the end of its 5-year physical life, or, if not, what is its optimal economic life? b. Would the introduction of salvage values, in addition to operating cash flows, ever reduce the expected NPV and/or IRR of a project? Explain

Management is contemplating the purchase of a new oven which cost $25,000 with an estimated salvage value of zero. Expected before tax cash savings from the new oven are $4,000 a year over its full depreciable life. Depreciation is computed using straight line over a 5 year life, and the cost of capital is 10%. At the end of the oven's life, it can be sold for $2,000. Assume a 40% tax rate. 4. What is the net present value of the new oven? IRR?

Answer 2

Question

Chapter 10, Problem 22P

a)

Summary Introduction

To determine: Whether the firm operate the truck until the end of its 5-years physical life and if not, determine its optimal economic life.

b)

Summary Introduction

To determine: Whether the introduction of salvage values, in addition to operating cash flows, ever decrease the expected NPV and/or IRR of a project.

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Answer 3

Question

Chapter 10, Problem 22P

a)

Summary Introduction

To determine: Whether the firm operate the truck until the end of its 5-years physical life and if not, determine its optimal economic life.

b)

Summary Introduction

To determine: Whether the introduction of salvage values, in addition to operating cash flows, ever decrease the expected NPV and/or IRR of a project.

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Answer 4

Question

Chapter 10, Problem 22P

a)

Summary Introduction

To determine: Whether the firm operate the truck until the end of its 5-years physical life and if not, determine its optimal economic life.

b)

Summary Introduction

To determine: Whether the introduction of salvage values, in addition to operating cash flows, ever decrease the expected NPV and/or IRR of a project.

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Answer 5

Chapter 10, Problem 22P

a)

Summary Introduction

To determine: Whether the firm operate the truck until the end of its 5-years physical life and if not, determine its optimal economic life.

b)

Summary Introduction

To determine: Whether the introduction of salvage values, in addition to operating cash flows, ever decrease the expected NPV and/or IRR of a project.

Answer 6

Chapter 10, Problem 22P

a)

Summary Introduction

To determine: Whether the firm operate the truck until the end of its 5-years physical life and if not, determine its optimal economic life.

Answer 7

Chapter 10, Problem 22P

a)

Summary Introduction

To determine: Whether the firm operate the truck until the end of its 5-years physical life and if not, determine its optimal economic life.

Answer 8

b)

Summary Introduction

To determine: Whether the introduction of salvage values, in addition to operating cash flows, ever decrease the expected NPV and/or IRR of a project.

Answer 9

b)

Summary Introduction

To determine: Whether the introduction of salvage values, in addition to operating cash flows, ever decrease the expected NPV and/or IRR of a project.

Answer 10

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Answer 11

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Answer 12

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Answer 13

Ch. 10 - Define each of the following terms: Capital...Ch. 10 - What types of projects require the least detailed...Ch. 10 - Explain why the NPV of a relatively long-term...Ch. 10 - When two mutually exclusive projects are being...Ch. 10 - Suppose a firm is considering two mutually...Ch. 10 - A project has an initial cost of 40,000, expected...Ch. 10 - Refer to Problem 10-1. What is the project’s IRR? Ch. 10 - Refer to Problem 10-1. What is the projects MIRR?Ch. 10 - Prob. 4P Ch. 10 - Prob. 5P

Whether the firm operate the truck until the end of its 5-years physical life and if not, determine its optimal economic life.

Solution Summary: The author explains that the firm should operate the truck until the end of its 5-years physical life and determine its optimal economic life. The introduction of salvage values will increase the NPV and IRR of a project.

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To determine: Whether the firm operate the truck until the end of its 5-years physical life and if not, determine its optimal economic life.

To determine: Whether the introduction of salvage values, in addition to operating cash flows, ever decrease the expected NPV and/or IRR of a project.

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