Question: 21. You are also considering another project which has a physical life of 3 years; that is, the machinery will be totally worn out after

21. You are also considering another project which has a physical life of 3 years; that is, the machinery will be totally worn out after 3 years. However, if the project were terminated prior to the end of 3 years, the machinery would have a positive salvage value. Here are the projects estimated cash flows:

Initial Investment End-of-Year

And Operating Net Salvage

Year Cash Flows Value

0 ($5,000) $5,000

1 2,300 3,100

2 1,900 2,000

3 1,750 0

Using the 7% cost of capital, what is the projects NPV if it is operated for the full 3 years? Would the NPV change if the company planned to terminate the project at the end of Year 2? At the end of Year 1? What is the projects optimal (economic) life?

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