(12-9)Scenario analysis.Your firm,AgricoProducts, is considering a tractor that would have a net cost of $37,000 would increase pre-tax 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 actually 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 tractors life on NPV.Use a 40% marginal federal-plus-state tax rate, a zero salvage value, and a WACC of 12%. Assuming each of the indicated lives has the same probability of occurring (probability = 1/3), what is the tractors expected NPV?(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.)

a. Tractor's NPV is actual life is 5 years

b. tractor's NPV is actual life is 4 years

c. . tractor's NPV is actual life is 8 years

d. Tractor's expected NPV