Ryan, CFO for Hoffmann, Inc., recently purchased a new delivery truck. The new truck costs $46,000, and is expected to generate net after-tax operating cash flows, including depreciation, of $27,000 per year for the 3 years that the firm is thinking about keeping it. The expected year- end abandonment values for the truck are given below. The company's cost of capital is 11 percent. What is the optimal economic life? Cash Flow 0 (46,000) 1 27,000 2 27,000 3 27,000 Year Abandonment Value 36,000 28,000 16,000 A. The EAA method confirms that the economic life is 1 year. B. The EAA method confirms that the economic life is 3 years. C. The EAA method confirms that the economic life is 2 years. D. The truck should not be bought since none of the NPVs are positive. E. The truck should be kept for 3 years since the 3-year option has the highest NPV.

Ryan, CFO for Hoffmann, Inc., recently purchased a new delivery truck. The new truck costs $46,000, and is expected to generate net after-tax operating cash flows, including depreciation, of $27,000 per year for the 3 years that the firm is thinking about keeping it. The expected year- end abandonment values for the truck are given below. The company's cost of capital is 11 percent. What is the optimal economic life? Cash Flow 0 (46,000) 1 27,000 2 27,000 3 27,000 Year Abandonment Value 36,000 28,000 16,000 A. The EAA method confirms that the economic life is 1 year. B. The EAA method confirms that the economic life is 3 years. C. The EAA method confirms that the economic life is 2 years. D. The truck should not be bought since none of the NPVs are positive. E. The truck should be kept for 3 years since the 3-year option has the highest NPV.

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter17: Long-term Investment Analysis

Section: Chapter Questions

Problem 2E

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