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. $__________

Write Your Message!

Name

Email id

Message

Verfication Code

User Account

All Pages

Finance: Scenario Analysis, Financial Management

Related Discussions:- Finance: Scenario Analysis

What are the drawbacks of benchmarking, What are the Drawbacks of benchmark...

Explain how to compute the overall balance, Explain how to compute the over...

Financial Management, Hello?

What is diversification, Diversification A strategy which tends to mo...

UMMB, what is the benefits of UMMB

Financial accounting, Briefly explain the accounting concepts which guide t...

Yield spread measures for floating-rate securities, In a floating rat...

Define the implications of the interest rate parity, Discuss the implicatio...

Ansawar, explain the concept of working capital.what are the factors which ...

Define a sunk cost, What is a sunk cost? Is it relevant while evaluating a...

Write Your Message!

Featured Services

Online Tutoring

Project Development

Exam Preparation

Course Help

Assignment Help

Popular Subjects

Assured A++ Grade

Academics

Major Subjects

Majors

Get In Touch

TERMS & POLICIES

HELP & SUPPORT