Scenario Analysis of a Company
Not what you're looking for?
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.
Purchase this Solution
Solution Summary
This solution provides calculations in Excel for a company's scenario analysis.
Education
- BA, Ain Shams University, Cairo Egypt
- MBA, California State University, Sacramento
Recent Feedback
- "ty i have more need help with"
- "ty i have jmore i need help with"
- "great help"
- "excellent help"
- "Very helpful and easy to understand."
Purchase this Solution
Free BrainMass Quizzes
Cost Concepts: Analyzing Costs in Managerial Accounting
This quiz gives students the opportunity to assess their knowledge of cost concepts used in managerial accounting such as opportunity costs, marginal costs, relevant costs and the benefits and relationships that derive from them.
Situational Leadership
This quiz will help you better understand Situational Leadership and its theories.
Income Streams
In our ever changing world, developing secondary income streams is becoming more important. This quiz provides a brief overview of income sources.
Organizational Behavior (OB)
The organizational behavior (OB) quiz will help you better understand organizational behavior through the lens of managers including workforce diversity.
Learning Lean
This quiz will help you understand the basic concepts of Lean.