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Scenario analysis. Your firm, Agrico Products, is considering a tractor that would have a net cost of $36,000, would increase pre-tax 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 $7,200 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 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 actually last for as long as 8 years.
Given this discussion, the CFO asks you to prepare a scenario analysis to evaluate the importance of the tractor's life on NPV. Use a 40 percent marginal federal-plus-state tax rate, a zero salvage value, and a WACC of 10 percent. Assuming each of the indicated lives has the same probability of occurring (probability = 1/3), what is the tractor's expected NPV? (Hint: Here straight-line depreciation is based on the MACRS class life of the tractor and is not affected by the actual life.
Calculate the NPV and IRR without mitigation. Round your answers to two decimal places.
At a 9% interest rate, what is the present value of these cash returns?
The total risk is composed of the unique risk and the market risk. The total risk is usually measured as the standard deviation whereas the market risk is measured as the beta associated with the market portfolio.
What was HHH's Economic Value Added(EVA) i.e., how much value did management add to stockholders wealth during the year?
If GE was considering two projects (one for $500 million to develop a satellite communications system and the other for a $30,000 new truck) on which project would the company be more likely to use a simulation analysis?
Find the amount to which $500 invested today will grow to in five years under each of the following conditions:
Why do you think it is easier for firms with weak credit positions to obtain lease financing than bank loan financing? Explain the difference between economic and financial definitions of business failure. What alternatives are available to a fail..
Oliver's management is trying to analyze the effect of a proposed new production process on its working capital investment. The new production process would allow Oliver to decrease its inventory conversion period to 15 days and to increase its da..
Conduct a sensitivity analysis by allowing investment, sales, variable costs, and fixed costs to vary by PLUS 10% and MINUS 10% from their original estimates. Which variable most impacts profitability?
The money flow in management such as the LCN is very similar to Corporations where the money flows from the top down.
what is the future value of these investment cash flows six years from today?
Suppose you just received a gift of $500 from your grandmother and you are thinking about saving this money for graduation, which is four years away. You have your choice between Bank A, which is paying seven percent for one-year deposits,
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