### Question details

A tractor that would have a net cost of \$36,000, would increase pre-
\$ 15.00

(12-9) 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 determine 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. Also, ignore the half-year convention for this problem.)

### Solutions

Available solutions
• A tractor that would have a net cost of \$36,000, would increase pre-
\$15.00

A t

Submitted on: 24 Feb, 2018 11:20:03 This tutorial has not been purchased yet .