Intermediate Financial Management
14th Edition
ISBN: 9780357516782
Author: Brigham, Eugene F., Daves, Phillip R.
Publisher: Cengage Learning
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Textbook Question
Chapter 12, Problem 22P
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 here. The company’s cost of capital is 10%.
- a. Should the firm operate the truck until the end of its 5-year physical life? If not, then 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/orIRR 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 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
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
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?
Chapter 12 Solutions
Intermediate Financial Management
Ch. 12 - What types of projects require the least detailed...Ch. 12 - Prob. 3QCh. 12 - Prob. 4QCh. 12 - Prob. 5QCh. 12 - A project has an initial cost of 40,000, expected...Ch. 12 - IRR Refer to Problem 12-1. What is the projects...Ch. 12 - Prob. 3PCh. 12 - Prob. 4PCh. 12 - Prob. 5PCh. 12 - Prob. 6P
Ch. 12 - Your division is considering two investment...Ch. 12 - Edelman Engineering is considering including two...Ch. 12 - Prob. 9PCh. 12 - Project S has a cost of $10,000 and is expected to...Ch. 12 - Prob. 11PCh. 12 - After discovering a new gold vein in the Colorado...Ch. 12 - Prob. 13PCh. 12 - Prob. 14PCh. 12 - The Pinkerton Publishing Company is considering...Ch. 12 - Shao Airlines is considering the purchase of two...Ch. 12 - The Perez Company has the opportunity to invest in...Ch. 12 - Filkins Fabric Company is considering the...Ch. 12 - The Ulmer Uranium Company is deciding whether or...Ch. 12 - The Aubey Coffee Company is evaluating the...Ch. 12 - Your division is considering two investment...Ch. 12 - The Scampini Supplies Company recently purchased a...Ch. 12 - You have just graduated from the MBA program of a...Ch. 12 - Prob. 2MCCh. 12 - Define the term “net present value (NPV).” What is...Ch. 12 - Prob. 5MCCh. 12 - What is the underlying cause of ranking conflicts...Ch. 12 - Prob. 7MCCh. 12 - Prob. 8MCCh. 12 - Prob. 9MCCh. 12 - Prob. 10MCCh. 12 - In an unrelated analysis, you have the opportunity...Ch. 12 - Prob. 12MC
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