Question
G.S corp. is considering a tractor that would have a cost of $36,000, would increase pretax cash flows before taking account of depreciation by $12,000
G.S corp. is considering a tractor that would have a cost of $36,000, would increase pretax cash flows before taking account of depreciation by $12,000 per year, and would be depreciated on a straight-line basis to zero over 5 years at the rate of $7,200 per year beginning the first year. (thus, annual cash flows would be $12,000 before taxes plus the tax savings that result from $7,200 of depreciation). The managers disagree about whether the tractor would last 5 years. 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 tractors life on the NPV. Use a 40% marginal federal-plus-state tax rate, a zero-salvage value, and a 10% WACC. Assuming each of the indicated lives has the same 5-year straight-line depreciation for all analyses and ignore the MACR half-year convention for this problem.
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