Question

Apedwa Inc. recently purchased a new delivery truck. The new truck costs $25,000 and is expected to generate net after-tax operating cash flows, including depreciation, of $7,000 at the end of each year. The truck has a 5-year expected life. The expected abandonment values (salvage values after tax adjustments) at different points in time are given below. The firm's cost of capital is 10 percent. What is ithis project's optimal economic life?
Year Annual Operating Cash Flow Salvage Value
0 ($20,000) $20,000
1 7,000 16,000
2 7,000 14,000
3 7,000 12,000
4 7,000 8,000
5 7,000 0

Answer 1

Answer:

This project's optimal economic life is 3 years.

Explanation:

Note: See the attached excel file for the calculation of equivalent annual cost

In the attached excel file, the following is used:

Cost of Capital = 10%  

From the attached excel file, the highest equivalent annual cost of $526 occurred in year 3. This implies that this project's optimal economic life is 3 years.

Download xlsx