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
Cyclical Variation By cyclical variations, we refer to the long-term movement of the variable about the trend line. Therefore, does the movement of the actual series about a tr

Valuation The process of finding out the current value of an asset or company is known as valuation. There are various techniques that can be utilized to find value, few are su

Harrelson Inc. currently has $750,000 in accounts receivable, and its days sales outstanding (DSO) is 55 days. It wants to reduce its DSO to 35 days by pressuring more of its custo

Banks like to make short-term, self-liquidating loans to businesses.  Why? Banks like can see where the funds are likely to come from such that the borrower is able to use to m

Settlement of the Index Options Contract In the index options contract, the premium to be paid or to be received is calculated for each CM after netting the positions at the en

what are some of the skills in asmall scale business

Interest Rate Derivatives: India's first trading on interest rate derivatives began in the National Stock Exchange of India (NSE) in June 2003 with futures on 91-day treasury

Calculated betas provide different information if they are obtained by using daily, weekly or monthly data. Which data is the most appropriate? Fernández and Carabias (2007) an

I need a report on the topic Inventory Turnover Ratio. Can you please assist me for Inventory Turnover Ratio report for about 2500 words?

Define the meaning of Overtrading When  a  company  is  trading  at  a  very  fast  pace,  it  would be  generating  sales  on  credit  with  speed, so have a large volume of t