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Scenario Analysis of a Company

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Scenario Analysis:

Your firm, Agrico Products, is considering the purchase of a tractor that will have a net cost of $36,000, will increase pre-tax operating cash flows before taking account of depreciation effects by $12,000 per year, and will be depreciated on a straight-line basis over 5 years at the rate of $7,200 per year, beginning the first year. (Annual cash flows will be $12,000, before taxes, plus the tax savings that result from $7,200 of depreciation.) The board of directors is having a heated debate about whether the tractor will actually last 5 years. Specifically, Elizabeth Brannigan insists that she knows of some tractors that have lasted only 4 years. Philip Glasgo agrees with Brannigan, but he argues that most tractors do give 5 years of service. Laura Evans says she has known some to last for as long as 8 years.

Given this discussion, the board asks you to prepare a scenario analysis to ascertain the importance of the uncertainty about the tractor's life. Assume a 40% marginal federal-plus-state tax rate, a zero salvage value, and a cost of capital of 10%. (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).

Please help and show the math.

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Solution Summary

This solution provides calculations in Excel for a company's scenario analysis.

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Scenario Analysis and Discussion

See the attached file.

Analyze two different scenarios.

Scenario Analysis and Discussion 1

Foreign Corrupt Practices Act
You are the Director of Foreign Sales for Acme Manufacturing, Inc., a U.S. company with headquarters in Miami, Florida. Acme Manufacturing of Brazil (AMB), a subsidiary of Acme Manufacturing Inc., was formed to represent Acme's interests in Brazil. Acme Manufacturing Inc. controlled all of AMB's actions, paid all expenses, employed management, and consolidated financial statements. You have recently discovered that your Sales Manager, Don Johnson, has been paying or authorizing bribes to the customs and other government officials in Brazil to accept documents that understate the value of Acme's products imported into Brazil to reduce the duties, sales taxes, and other fees owed by AMB.
Using Foreign Corrupt Practices Act (FCPA), analyze the issues facing Acme Manufacturing Inc. and the individuals involved, as well as arguments for and against the allegations that these parties have violated the FCPA. Consider the following in your analysis:
? What is the purpose of the FCPA?
? What is the difference between a bribe and a facilitation fee? Which one applies in this case?
? Does it make a difference that bribes are legal in Brazil?
? Does the FCPA make it more difficult for American companies to compete in foreign countries?
? What are the legal elements needed to prove bribery under the FCPA?
? If one or more of the parties are found guilty, what recommendations would you make to Acme Manufacturing Inc.?
Evaluation Criteria for Scenario Analysis and Discussion Response:
Accurately stated the purpose of the FCPA and articulated the difference between a bribe and a facilitation fee. [4 points]
Explained the implications of legal bribes in Brazil.
Listed the legal elements needed to prove bribery under the FCPA.
Assessed how the FCPA affects American companies competing globally and recommended a course of action in the event of a guilty verdict.

Scenario Analysis and Discussion 2

Consumer Products Safety Commission

With increased efforts to provide low-cost goods while maximizing profits, your company decided to move its toy manufacturing plant to Adjistan. The move resulted in the loss of 1200 jobs in the U.S. and increased profit for the shareholders. As the Director of Human Resources, you have recently discovered that the factory management in Adjistan has been involved in child labor practices in violation of internationally accepted standards. After discussing this issue with the management of the Adjistan facility, you determine they have no intention of improving the working conditions. To make matters worse, you discover that the toys are manufactured using lead paint, which is prohibited for use in toys in the U. S.

Identify at least three ethical issues presented in this scenario. Provide a course of action to correct each ethical issue or potentially unethical practices that are identified. Provide at least three recommendations to your company's officers to prevent future violations.

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