Marginal federal-plus-state tax rate-zero salvage value

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Reference no: EM131314016

Your firm, Agrico Products, is considering a tractor that would have a cost of $36,000, would increase pretax operating cash flows before taking account of depreciation by $12,000 per year, and would be depreciated on a straight-tine basis to zero over 5 years at the rate of $7, 200 per year beginning the first year. (Thus, annual cash flows would be $12,000 before taxes plus the tax savings that result from $7, 200 of depredation.) The managers disagree about whether the tractor would 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 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 XPV. 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?

Reference no: EM131314016

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