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
Taxation In the US, every state has a different set of rules governing the taxation of Hedge Funds and the investors who put their money in them. In some countries, Hedge Funds

What are the advantages and disadvantages of the aggressive working capital financing approach? An aggressive working capital financing approach generally results in a lower cost

It is the third-largest stock exchange by trading size in the United States. In 2008 it was get hold by the NYSE Euronext and turn into the NYSE Amex Equities in 2009. The AMEX is

SECURITIES AND EXCHANGE COMMISSION OF USA In the United States, securities industry is regulated by the United States Securities and Exchange Commission (SEC). It is the govern

What are "in-market" mergers? A: An in-market merger is one that occurs between two banks operating in similar geographic area, usually a city or metropolitan area. The merged in

Describe the term- Investment Decision Investment decision, also referred to as the capitalbudgeting decision, simply means decisions to acquire assets or to invest in aproj

How does a sinking fund function in the retirement of an outstanding bond issue? Where a company puts payments that are then used to buy back outstanding bonds is known as a si

What action(s) should be taken if analysis of pro forma financial statements reveals positive trends?  Negative trends? When examine the pro forma statements, managers habi

Question: On a pilot basis a Government Department, PPO, is preparing its financial statements using accrual basis. The following information is provided: The following bala

Money Market Mutual Fund Even as the Mutual Funds show a promise of becoming a major instrument of household savings, another concept which is being talked about and waiting to