What is the after-tax cash flow impact on depreciation?(below on second chart) Problem 12-18 -- Scenario Analysis Your firm, Agrico Products, is considering a tractor til at would have a cost of $36,000, would increase pretax operating 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 annual depreciation.) The managers are having a heated debate about whether the tractor would last 5 years. The controller insists she knows of tractors that have lasted only 4 years. The treasurer agrees with the controller, but he argues that most tractors do give 5 years of service. The service manager states that some last for as long as 8 years. Given this discussion, the CFO asks you to prepare a scenario analysis to determine importance of a tractor's life on the NPV. Use a 40% marginal federal-plus-state tax rate, a zero salvage value, and a 10% WACC. Assuming that each of the estimated lives has the same probability of occurring (probability = 1/3), what is the tractor's expected NPV? (Hint: Use the 5-year straight-line depreciation for all analyses and ignore the MACRS half-year convention for this problem.) i Problem 12-18 - Scenario Analysis 3 Problem Questions 4 a. What is the tractor's NPV given a life of... a. 1 5 Years? 15 Years? a 2 4 Years? a.3 8 Years? Your Answers $2,211.13 ($1,765.00) $12,014.00 $4,153.38 7 b. What is the tractor's Expected NPV? 9 Problem Parameters 10 New Machine Cost 11 Annual Increase in Operating Cash Flows (Pre-Tax) 12 Annual After-Tax Increase in Operating Cash Flow (1-1) 13 Straightline Annual Depreciation (5 Years) 14 After-Tax Cash Flow Impact of Depreciation 15 Machine's Salvage Value 16 Marginal Tax Rate 17 WACC Values ($36,000) $ 12,000 $7,200 $7,200 40% 10%