Question

The scampini supplies company recently purchased a new delivery truck. The new truck has an after-tax cost of 21,000, and it is expected to generate after-tax cash flows of7,250 per year. The truck has a 5-year expected life. The expected year-end abandonment values (after-tax salvage values) for the truck are given below. The company's WACC is 9

1) $5,000
2) $6,000
3) $7,000
4) $8,000

Answer 1

To determine the expected year-end abandonment value for the new delivery truck, we need to calculate the net present value (NPV) of the cash flows by using the given discount rate (WACC) of 9% and choosing the abandonment value that results in NPV = 0.

The correct option is not given.

Step-by-step explanation:

The question is asking about the expected year-end abandonment value (salvage value) for a new delivery truck purchased by the Scampini Supplies Company. The after-tax cost of the truck is $21,000 and it is expected to generate after-tax cash flows of $7,250 per year for 5 years.

We are given the expected year-end abandonment values (after-tax salvage values) for the truck. To determine the appropriate abandonment value, we need to calculate the net present value (NPV) of the cash flows and choose the abandonment value that results in a NPV of zero. The formula to calculate NPV is:

NPV = -Initial Cost + (Cash Flow / (1 + WACC)Year)

Using the given discount rate (WACC) of 9%, we can calculate the NPV for each abandonment value and choose the one that results in NPV = 0. The abandonment value that satisfies this condition is the correct answer.

The correct option is not given.