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
Company Z has just been organized. It is expected to experience zero growth next year and grow at a 10% rate in year 2.  Beginning in the third year the company should attain a 5%

I have a assignment of financial accounting Its a report on company Assignment length 2000 words

Advantages and Disadvantages of Investing in Gilts Advantages As the security is issued by the GOI, it has a minimal default risk. Investors have the opportunity to inves

How to get cost differential when 100% done by a single party only.

Explain how using a risk-adjusted discount rate improves capital budgeting decision making compared to using a single discount rate for all projects? The risk-adjusted discount

How and why does working capital influence the incremental cash flow estimation for a planned large capital budgeting project?  Explain. Many large projects need additional worki

At 31 July 2010 this instrument meets the definition of a derivative: Small or no initial investment. Its value is dependent on an underlying economic item; exchange ra

A total of $426,000 seed-funding would be ideal to start the project on a local basis. The cost analysis done above is for the material required to perform the work, and as the wor

Explain the pricing spill-over effect. Suppose a firm operating in a segmented capital market (such as China, for example) decides to cross-list its stock in New York or London.

ICQ's designed to: Identify possible areas of weakness. Discover existence of internal controls. Questions are framed to highlight situations where: NO su