Question

DataPoint Engineering is considering the purchase of a new piece of equipment for $330,000. It has an eight-year midpoint of its asset depreciation range (ADR). It will require an additional initial investment of $150,000 in nondepreciable working capital. $57,500 of this investment will be recovered after the sixth year and will provide additional cash flow for that year. Income before depreciation and taxes for the next six are shown in the following table. Use Table 12–11, Table 12–12. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

Year	Amount
1	$	212,000
2		178,000
3		148,000
4		133,000
5		104,000
6		94,000

The tax rate is 25 percent. The cost of capital must be computed based on the following:

		Cost (aftertax)			Weights
Debt	Kd		10.30	%		55	%
Preferred stock	Kp		14.20			10
Common equity (retained earnings)	Ke		19.00			35

a. Determine the annual depreciation schedule. (Do not round intermediate calculations. Round your depreciation base and annual depreciation answers to the nearest whole dollar. Round your percentage depreciation answers to 3 decimal places.)

Answer is not complete.

	Year Depreciation Base Percentage Depreciation Annual Depreciation 1 $66,000 2 105,600 3 63,360 4 37,950 5 37,950 6 19,140 $330,000

b. Determine the annual cash flow for each year. Be sure to include the recovered working capital in Year 6. (Do not round intermediate calculations and round your answers to 2 decimal places.)

	Year Cash Flow 1 2 3 4 5 6

c. Determine the weighted average cost of capital. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Answer is complete but not entirely correct.

	Weighted average cost of capital

d-1. Determine the net present value. (Use the WACC from part c rounded to 2 decimal places as a percent as the cost of capital (e.g., 12.34%). Do not round any other intermediate calculations. Round your answer to 2 decimal places.)

	Net present value

Answer 1

1	Year	Depreciation Base	Percentage Depreciation	Annual Depreciation
	1	330,000	0.200	66,000
	2	330,000	0.320	105,600
	3	330,000	0.192	63,360
	4	330,000	0.115	37,950
	5	330,000	0.115	37,950
	6	330,000	0.058	19,140
				330,000
2
	Year	1	2	3	4	5	6
	EBDT	212,000	178,000	148,000	133,000	104,000	94,000
	Less: Dep.	66,000	105,600	63,360	37,950	37,950	19,140
	EBT	146,000	72,400	84,640	95,050	66,050	74,860
	Tax @ 25%	36,500	18,100	21,160	23,763	16,513	18,715
	EAT	109,500	54,300	63,480	71,288	49,538	56,145
	Add: Dep.	66,000	105,600	63,360	37,950	37,950	19,140
	Recovery of working capital						57,500
	Cash Flow	175,500	159,900	126,840	109,238	87,488	132,785
3			Cost	Weights	Weighted
			(aftertax)
	Debt	Kd	10.30%	55.00%	5.67%
	Preferred stock	Kp	14.50%	10.00%	1.45%
	Common equity (retained earnings)	Ke	19.00%	35.00%	6.65%
			Weighted average cost of Capital		13.77%
4	Year	Cash Flow (inflows)	PVIFat 13.77%	Present Value
	1	175,500	0.87897	154,258.59
	2	159,900	0.77258	123,535.83
	3	126,840	0.67907	86,133.67
	4	109,238	0.59688	65,201.97
	5	87,488	0.52464	45,899.42
	6	132,785	0.46114	61,232.57
			Present value of inflows	536,262
			Present value of outflows	480,000
			Net present value	56,262