Brigham & Ehrhardt, Financial Management Theory and Practice, 15th ed. pg. 449-451, CH 10, Minicase

Question Part L.

l. You are also considering another project that 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 salvage value. Here are the project's estimated cash flows:

	Year	Initial Investment and Operating Cash Flows			End-of-Year Net Salvage Value
	0	-5000			5000
	1	2100			3100
	2	2000			2000
	3	1750			0
Calculate and determine, using the 10% cost of capital, what is the project's 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's optimal (economic) life?
Rate	10%
	Year
	0
	1
	2 3