Originally Posted By Elderp Ok, I got a test coming up on Tues. May 2nd. I have most of this chapter about capital budgeting figured out. I am having problems with one problem on Abandonment Value. Here is the question perhaps someone out there is really good at finance and can tell me how to do this problem: The Scampini Supplies Company recently purchased a new delivery truck. The new truck costs $22,500, and it is expected to generate net after-tax operating cash flows, including depreciation, of $62500 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 cost of capital is 10 percent. Year Annual Operating Cash Flow Abandonment Value 0 ($22,500) ----- 1 6250 $17500 2 6250 14000 3 6250 11000 4 6250 5000 5 6250 0 Should the firm operate the truck until the end of its 5 year physical life; if not, what is its optimal economic life? Ok, I know how to figure out NPV (Net Present Value) and EAA (Equivalent Annual Annuity) but I have no idea what that has to do with the abandonment value. The answer at the back of the book is: No, NPV3= $1,307.29, I got the year 3 part but I didn't get the NPV part. I tried going to my professor today but he didn't show up, I have been having a big problem with professors not showing up this quarter for some reason. However, the test is tuesday so I am kinda stuck. If anyone out there knows how to do this please let me know.
Originally Posted By RoadTrip Doesn’t' a train need to be leaving Omaha heading east somewhere in this question? ;-) P.S. I could have answered this 30-some years ago when I was taking Finance and Accounting courses. I've forgotten it all. Sorry.
Originally Posted By Black Pearl Your professor didn't show up because he doesn't know how to arrive at the answer himself.
Originally Posted By Black Pearl Can you calculate what the NPV would be for selling the truck each year, then compare the 5 years? Would it be that you use the truck to as close to zero as you can without getting to a negative NPV? But then again it seems like you would want the highest NPV. I know nothing of finance, but just guessing.
Originally Posted By Elderp Actually, you are not too far off. The book says something about doing that but how exactly to do that I am not sure. "Your professor didn't show up because he doesn't know how to arrive at the answer himself." Actually, in class we were joking that he must of lost his teacher's copy of the book and therefore decided not to come in.
Originally Posted By PlainoLJoe wouldnt they want to sell it before year 4? This way they are not losing money on the truck?
Originally Posted By Elderp 6250 is the cash flows generated by using the truck the number on the left is the abandonment value of the truck (the value that could be derived if they stopped using the truck that year). I wish it was as easy as just subtracting the numbers in year 4 but the trick is to somehow get the NPV for each year (which I can do) and compare it to the NPV of the abandonment value (which I have no clue on).
Originally Posted By Elderp Well my brother-in-law might be able to put it back to together again he got the answer: "Ok, I figured it out... First thing to do is to calculate the PV for each year. For the time being, ignore the abandonement value. You will get: NP0 = -22500.00 NP1 = 5681.82 NP2 = 5165.29 NP3 = 4695.72 NP4 = 4268.83 NP5 = 3880.76 Next step... Calculate the PV for each year, but add in the abandonment value to the cash flow for each year: (We will call these values NA1, NA2, etc...) NA0 = - 22500.00 NA1 = 21590.91 NA2 = 16735.54 NA3 = 12960.18 NA4 = 7683.90 NA5 = 3880.76 Now, when you caculate your net present value (NPV) you normally totally all the PV values up to the current year. Do the same thing here. The trick is to use the values for all the years except the current one from the first group. For the current year, use the value from the second group. The thought behind this is, you can only make money off of selling the truck one time (in the year you sell it). You should get NPV1 = NP0+NA1 = -909.09 NPV2 = NP0+NP1+NA2 = -82.64 NPV3 = NP0+NP1+NP2+NA3 =1307.29 NPV4 = NP0+NP1+NP2+NP3+NA4 = 726.73 NPV5 = NP0+NP1+NP2+NP3+NP4+NA5 = 1192.42 If you compare the NPV values for each year, you will see the the best year to sell (highest value) is year 3 where NPV = 1307.29. " I'm still processing the answer but at least I think I am there now.
Originally Posted By Black Pearl Oh. I made an easy mistake. I didn't think to add each NPV as the years increase, in other words I forgot that if you sell in year 3, you have kept the truck for year 3, 2, 1, and obviously 0. I didn't know HOW to do the actual calculation of NPV's, but the logic conceptually makes sense.
Originally Posted By poirot the salvage value in year 3 is an inflow and its present value is calculated by multiplying the salvage value of the truck by 0.7513 ( present value of one dollar after 3 years with a discount factor of 10%) you can find it in the present value table. then add it to the present value of the cash flows in three years by using the annuty table , abd subtract 22,500 and voila 1,307.29
Originally Posted By Goofyernmost I'd have to say that the answer is "The 1957 World Series"...that's my final answer.
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Originally Posted By Princessjenn5795 I was kind of wondering the same thing because that did not really sound like him.
Originally Posted By Scutr It seems someone has been bullying Mr X, and that someone appears to have multiple personalities on the boards.
Originally Posted By Mr X No, it was me. "Elder"P was involved in horrific acts (as was UtahJosh), and I will not stand by and watch while he casually gets back to business on these boards after leaving for a while, proud of his prejudice and his bigotry. No hacks involved. Doobie can ban me if he wants to.
