Question
In: Finance
Your firm, Agrico Products, is considering a tractor that would have a cost of $35,000, would...
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.
Assume that if the tractor only lasts 4 years, then the firm would receive a tax credit in Year 4 because the tractor's salvage value at that time is less than its book value. Under this scenario, the firm would not take depreciation expense in Year 5.
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 12% WACC. Assuming each of the indicated lives has the same probability of occurring (probability = 1/3), what is the tractor's expected NPV?
Do not round intermediate calculations. Negative values, if any, should be indicated by a minus sign. Round your answers to the nearest cent.
- Tractor's NPV if actual life is 5 years.
$ - Tractor's NPV if actual life is 4 years.
$ - Tractor's NPV if actual life is 8 years.
$ - Tractor's expected NPV.
Solutions
jeff jeffy answered 1 year agoRelated Solutions
Your firm, Agrico Products, is considering a tractor that would have a cost of $35,000, would...
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 $13,000 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 $13,000 before taxes plus the tax
savings that result from $7,000 of depreciation.) The managers
disagree about whether the tractor...
Your firm, Agrico Products, is considering a tractor that would have a cost of $35,000, would...
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...
Your firm, Agrico Products, is considering a tractor that would have a cost of $36,000, would...
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-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 savings
that result from $7,200 depreciation.) The manager disagrees about
weather the tractor would last...
Your firm, Agrico Products, is considering a tractor that would have a cost of $37,000, would...
Your firm, Agrico Products, is considering a tractor that would
have a cost of $37,000, 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 $7,400 per year beginning the first year. (Thus,
annual cash flows would be $12,000 before taxes plus the tax
savings that result from $7,400 of depreciation.) The managers
disagree about whether the tractor...
Your firm, Agrico Products, is considering a tractor that would have a cost of $37,000, would...
Your firm, Agrico Products, is considering a tractor that would
have a cost of $37,000, would increase pretax operating cash flows
before taking account of depreciation by $13,000 per year, and
would be depreciated on a straight-line basis to zero over 5 years
at the rate of $7,400 per year, beginning the first year. (Thus,
annual cash flows would be $13,000 before taxes plus the tax
savings that result from $7,400 of depreciation.) The managers are
having a heated debate...
Your firm, Agrico Products, is considering a tractor that would have a cost of $37,000, would...
Your firm, Agrico Products, is considering a tractor that would
have a cost of $37,000, would increase pretax operating cash flows
before taking account of depreciation by $13,000 per year, and
would be depreciated on a straight-line basis to zero over 5 years
at the rate of $7,400 per year, beginning the first year. (Thus,
annual cash flows would be $13,000 before taxes plus the tax
savings that result from $7,400 of depreciation.) The managers are
having a heated debate...
Your firm, Agrico Products, is considering a tractor that would have a cost of $37,000, would...
Your firm, Agrico Products, is considering a tractor that would
have a cost of $37,000, 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 $7,400 per year, beginning the first year. (Thus,
annual cash flows would be $12,000 before taxes plus the tax
savings that result from $7,400 of depreciation.) The managers are
having a heated debate...
Bau Long-Haul, Inc., is considering the purchase of a tractor-trailer that would cost $325,526, would have...
Bau Long-Haul, Inc., is considering the purchase of a
tractor-trailer that would cost $325,526, would have a useful life
of 7 years, and would have no salvage value. The tractor-trailer
would be used in the company's hauling business, resulting in
additional net cash inflows of $83,000 per year. The internal rate
of return on the investment in the tractor-trailer is closest to
(Ignore income taxes.):
Noreen_5e_Rechecks_2019_10_16
Multiple Choice
19%
17%
14%
16%
Bau Long-Haul, Inc., is considering the purchase of a tractor-trailer that would cost $281,660, would have...
Bau Long-Haul, Inc., is considering the purchase of a
tractor-trailer that would cost $281,660, would have a useful life
of 7 years, and would have no salvage value. The tractor-trailer
would be used in the company's hauling business, resulting in
additional net cash inflows of $80,000 per year. The internal rate
of return on the investment in the tractor-trailer is closest to
(Ignore income taxes.): Click here to view Exhibit 13B-1 and
Exhibit 13B-2, to determine the appropriate discount factor(s)...
logan's Landscaping purchased a tractor at a cost of $35,000 and sold it three years later...
logan's Landscaping purchased a tractor at a cost of
$35,000 and sold it three years later for $10,000. Landscaping
recorded deprecation using the straight-line method, a five-year
service life, and a 5000 residue little value. Factors are included
in the equipment account. The journal entry to record the sale
would include
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