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## Your firm, Agrico Products, is considering a tractor that wo

Assignment Help Finance Your firm, Agrico Products, is considering a tractor that wo

# Your firm, Agrico Products, is considering a tractor that wo

Your firm, Agrico Products, is considering a tractor that would have a cost of \$37,000, would increa… Show more 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 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. 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? (Hint: Use the 5-year straight-line depreciation for all analyses and ignore the MACRS half-year convention for this problem.) Round your answers to two decimal places. Do not round intermediate calculations. 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. \$ • Show less

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