Finance: Scenario Analysis, Financial Management

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. $__________
Posted Date: 10/25/2012 3:51:46 PM | Location : United States







Related Discussions:- Finance: Scenario Analysis, Assignment Help, Ask Question on Finance: Scenario Analysis, Get Answer, Expert's Help, Finance: Scenario Analysis Discussions

Write discussion on Finance: Scenario Analysis
Your posts are moderated
Related Questions
Day count convention is a system used to determine the number of days between two coupon dates. It is important in calculating accrued interest and present value

The payments on GPMs unlike the payments on traditional mortgages are not equal. The payments under GPMs start at a relatively low level and rise for a specified

How do we estimate expected incremental cash flows for a proposed capital budgeting project? We valuate expected incremental cash flows for a proposed project by valuating the

Takeover, Inc. is a Delaware corporation whose only stated purpose is to acquire companies.  It has virtually no assets and no employees other than the original founders who contri

What is Capital Budgeting Capital Budgeting is probably the most financial decision for a firm. It relates to selection of an asset or investment proposal or course of action

which type of financing is appropriate to each firm

What is the effect of stock (not cash) dividends and stock splits on the market price of common stock?  Why do corporations declare stock splits and stock dividends? Stock divi

Q. Explain about Discount Rate? Discount Rate - Rate at which INTEREST is deducted in advance of the issuance, selling, purchasing or lending of a financial instrument. Also, t

London Interbank Offered Rate (LIBOR) This is the base lending rate which is charged by banks in the London Eurocurrency market. LIBOR is the European equivalent of the U.S. pr

Exchange of Physicals: A trader can also complete the futures contract by engaging in exchange of physicals. In this method, the parties agree to exchange cash and the commodit