Question

The Scampini Supplies Company recently purchased a new delivery truck. The new truck costs $25,000, and it is expected to generate after-tax cash flows, including depreciation, of $6,500 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 11%.

Year	Annual After-Tax Cash Flow		Abandonment Value
0	($25,000)			-
1	6,500			$20,000
2	6,500			15,500
3	6,500			13,500
4	6,500			7,500
5	6,500			0

What is the truck's optimal economic life? Round your answer to the nearest whole number.

   year(s)

Answer 1

	Present Value (PV) of Cash Flow:
	(Cash Flow)/((1+i)^N)
	i=Discount Rate=WACC=11%=0.11
	N=Year of Cash Flow
		N	A	B=A/(1.11^N)	C=B-25000	D	E=D/(1.11^N)	F	G=C+F	H(Using PMT function with Rate=11%,Nper=N,PV=-G)
		End of year	Abandonment Value	PV of abandonment Value	PV of net capital cost	Annual Cash Flow	PV of annual Cash flow	Cumulative PV of annual Cash flow	PV of Net Cash Flow	Equivalent annual Cashflow
		0
		1	$20,000	$18,018	($6,982)	$6,500	$             5,856	$    5,856	($1,126)	($1,250)
		2	$15,500	$12,580	($12,420)	$6,500	$             5,276	$ 11,131	($1,288)	($752)
		3	$13,500	$9,871	($15,129)	$6,500	$             4,753	$ 15,884	$755	$309
		4	$7,500	$4,940	($20,060)	$6,500	$             4,282	$ 20,166	$106	$34
		5	$0	$0	($25,000)	$6,500	$             3,857	$ 24,023	($977)	($264)
	PV of net Cash flow is highest in Year3
	Equivalent annual cash flow is highest in year 3
	OPTIMAL ECONOMIC LIFE	3 Years