Your firm, Agrico Products, is considering a tractor that would have a cost of $35,000, would...

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Your firm, Agrico Products, is considering a tractor that wouldhave a cost of $35,000, would increase pretax operating cash flowsbefore taking account of depreciation by $12,000 per year, andwould be depreciated on a straight-line basis to zero over 5 yearsat the rate of $7,000 per year, beginning the first year. (Thus,annual cash flows would be $12,000 before taxes plus the taxsavings that result from $7,000 of depreciation.) The managers arehaving a heated debate about whether the tractor would actuallylast 5 years. The controller insists that she knows of tractorsthat have lasted only 4 years. The treasurer agrees with thecontroller, but he argues that most tractors actually do give 5years of service. The service manager then states that some lastfor as long as 8 years.
Assume that if the tractor only lasts 4 years, then the firmwould receive a tax credit in Year 4 because the tractor's salvagevalue at that time is less than its book value. Under thisscenario, the firm would not take depreciation expense in Year5.
Given this discussion, the CFO asks you to prepare a scenarioanalysis to determine the importance of the tractor's life on theNPV. Use a 40% marginal federal-plus-state tax rate, a zero salvagevalue, and a 9% WACC. Assuming each of the indicated lives has thesame probability of occurring (probability = 1/3), what is thetractor's expected NPV? Do not round intermediate calculations.Negative values, if any, should be indicated by a minus sign. Roundyour 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. $

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NPV if life is 4 Years Year 0 1 2 3 4 cost of truck 35000 before tax operating cash flow 12000 12000 12000 12000 depreciation 7000 7000 7000 7000 before tax cash flow 5000 5000 5000 5000 tax 40 2000 2000 2000 2000 after tax cash flow 3000 3000 3000 3000 depreciation 7000 7000 7000 7000 tax credit due to loss of truck at year 4 350002800040 0 0 0 2800 net operating cash flow after tax cash flowdepreciationtax credit 35000 10000 10000 10000 12800 See Answer

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Your firm, Agrico Products, is considering a tractor that wouldhave a cost of $35,000, would increase pretax operating cash flowsbefore taking account of depreciation by $12,000 per year, andwould be depreciated on a straight-line basis to zero over 5 yearsat the rate of $7,000 per year, beginning the first year. (Thus,annual cash flows would be $12,000 before taxes plus the taxsavings that result from $7,000 of depreciation.) The managers arehaving a heated debate about whether the tractor would actuallylast 5 years. The controller insists that she knows of tractorsthat have lasted only 4 years. The treasurer agrees with thecontroller, but he argues that most tractors actually do give 5years of service. The service manager then states that some lastfor as long as 8 years.Assume that if the tractor only lasts 4 years, then the firmwould receive a tax credit in Year 4 because the tractor's salvagevalue at that time is less than its book value. Under thisscenario, the firm would not take depreciation expense in Year5.Given this discussion, the CFO asks you to prepare a scenarioanalysis to determine the importance of the tractor's life on theNPV. Use a 40% marginal federal-plus-state tax rate, a zero salvagevalue, and a 9% WACC. Assuming each of the indicated lives has thesame probability of occurring (probability = 1/3), what is thetractor's expected NPV? Do not round intermediate calculations.Negative values, if any, should be indicated by a minus sign. Roundyour 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. $