User Account

All Pages

Finance: Scenario Analysis, Financial Management

Assignment Help:
Scenario analysis
Your firm, Agrico Products, is considering a tractor that would have a cost of $35,000, would increase pretax operating cash flows before taking account of depreciation by $12,000 per year, and would be depreciated on a straight-line basis to zero over 5 years at the rate of $7,000 per year, beginning the first year. (Thus, annual cash flows would be $12,000 before taxes plus the tax savings that result from $7,000 of depreciation.) The managers are having a heated debate about whether the tractor would actually last 5 years. The controller insists that she knows of tractors that have lasted only 4 years. The treasurer agrees with the controller, but he argues that most tractors actually do give 5 years of service. The service manager then states that some last for as long as 8 years.
Given this discussion, the CFO asks you to prepare a scenario analysis to determine the importance of the tractor''s life on the NPV. Use a 40% marginal federal-plus-state tax rate, a zero salvage value, and a 10% WACC. Assuming each of the indicated lives has the same probability of occurring (probability = 1/3), what is the tractor''s expected NPV? (Hint: Use the 5-year straight-line depreciation for all analyses and ignore the MACRS half-year convention for this problem.)
Round your answers to two decimal places. Do not round intermediate calculations.
a. Tractor''s NPV if actual life is 5 years. $__________
b. Tractor''s NPV if actual life is 4 years. $_________
c. Tractor''s NPV if actual life is 8 years. $__________
d. Tractor''s expected NPV. $__________

Related Discussions:- Finance: Scenario Analysis

How could we obtain an indisputable discount rate, How could we obtain an i...

How could we obtain an indisputable discount rate? How should we calculate the beta and the risk premium? There is no indisputable discount rate: a discount rate is a subjectiv

Financial Managemente.., Madhuban group manufactures a product. The followi...

Madhuban group manufactures a product. The following particulars are as follows: 5 Monthly demand 1000 units Cost of placing an order Rs. 100 Annual carrying cost per unit Rs. 15 N

Swap market, Swap Market: The fall of Bretton Wood system in early 1970...

Swap Market: The fall of Bretton Wood system in early 1970s weakened of the pound. It was imperative to stop the downward slide of the pound. In order to control the flow of fo

Treasury returns resulting from yield curve movements, Robert Litterman and...

Robert Litterman and Jose Scheinkman were the first to study how changes in the shapes of the yield curve affect the total return on the Treasury securities. The histor

Option adjusted spread, The formula explained in the above paragraph ...

The formula explained in the above paragraph enables the investor to compute the value of a bond with an embedded option as the difference between the value of an

Determine the revenues earned from overseas markets, a) This refers a busin...

a) This refers a business, such as Palmolive-Colgate being able to sell the same product using the same marketing approach all over the world. It is used by firms with global brand

Wacc and cost of common equity, how to get the expected growth rate?

how to get the expected growth rate?

Evaluate of risk-adjusted discount rate, Q. Evaluate of Risk-Adjusted Disco...

Q. Evaluate of Risk-Adjusted Discount Rate? Illustration: - From the following date state which project is preferable: Year Project A Proj

Hedge funds, Hedge Funds: Hedge Funds are investment partnerships that ...

Hedge Funds: Hedge Funds are investment partnerships that strive for above average returns through active portfolio management and whose primary compensation is a percentage of

Define the term- profit, Define the term- profit The term "profit" can ...

Define the term- profit The term "profit" can be used in two senses. As an owner-oriented concept it refers to amount and share of national income that is paid to owners of bus

Write Your Message!

Captcha
Order Assignment

Featured Services

Order Now

Popular Subjects

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

Submit Assignment

Academics

Major Subjects

Majors

Get In Touch

whatsapp: +91-977-207-8620

Phone: +91-977-207-8620

Email: [email protected]

TERMS & POLICIES

HELP & SUPPORT

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd