Problem:
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 10.5 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 |
|
Required:
Question: What is the optimal number of years to operate the truck?
Note: Please show how you came up with the solution.