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## Accounting

 Accounting Basics Cost Accounting Financial Accounting Managerial Accounting Auditing Taxation

Task1. Scenario analysis Your firm, Agrico Products, is considering a tractor which would have a cost of \$36,000, would raise pre-tax operating cash flows before taking account of depreciation by \$12,000 per year, and would be depreciated on the straight-line basis to zero over five years at the rate of \$7,200 per year, starting the first year. (Thus, annual cash flows would be \$12,000 before taxes plus the tax savings which result from \$7,200 of depreciation.) The managers are having a heated debate about whether the tractor would actually last five years. The controller persists that she knows of tractors which have lasted only four years. The treasurer agrees with the controller, but he argues that most tractors actually do give five years of service. The service manager then states that some last for as long as eight years. Given this discussion, the CFO asks you to make a scenario analysis to find out the significance of the tractor's life on the NPV. Use a 40% marginal federal-plus-state tax rate, a zero salvage value, and a 8% WACC. Supposing 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.)

A. Tractor's NPV when actual life is 5 years?

B. Tractor's NPV when actual life is 4 years?

C. Tractor's NPV when actual life is 8 years?

D. Tractor's expected NPV?

Financial Accounting, Accounting

• Category:- Financial Accounting
• Reference No.:- M93951

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