Reduce the expected npv and/or irr of a project

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Reference no: EM132038105

ABANDONMENT OPTION The Sorensen 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 $5,875 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 below. The company's WACC is 9%. Year Annual After-Tax Cash Flow Abandonment Value 0 ($22,500) - 1 5,875 $17,000 2 5,875 15,000 3 5,875 9,000 4 5,875 4,750 5 5,875 0 a. What is the truck's optimal economic life? year(s) b. Would the introduction of abandonment values, in addition to operating cash flows, ever reduce the expected NPV and/or IRR of a project?

Reference no: EM132038105

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