Reference no: EM132444139

Economic Life

The Shipping Company recently purchased a new forklift. The new piece of equipment cost $22,500, and it is expected to generate net after-tax operating cash flows, including depreciation, of $6,250 per year. The forklift has a 5-year expected life. The expected salvage values after tax adjustments for the forklift are given below. The company's cost of capital is 11.5 percent.

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               

A) What is the optimal number of years to operate the forklift?

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.