Question

DataPoint Engineering is considering the purchase of a new piece of equipment for $370,000. It has an eight-year midpoint of its asset depreciation range (ADR). It will require an additional initial investment of $190,000 in nondepreciable working capital. $67,000 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	$	224,000
2		186,000
3		156,000
4		141,000
5		108,000
6		98,000

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

		Cost (aftertax)			Weights
Debt	Kd		5.20	%		30	%
Preferred stock	Kp		9.80			10
Common equity (retained earnings)	Ke		14.00			60

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.)

Year	Depreciation Base	Percentage Depreciation	Annual Depreciation
1
2
3
4
5
6
			$

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.)

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.)

d-2. Should DataPoint purchase the new equipment?

Answer 1

12 Equipment cost 13 Working capital 14 Working capital recovery 15 Year 1 EBDT 16 Year 2 EBDT 17 Year 3 EBDT 18 Year 4 EBDT 19 Year 5 EBDT 20 Year 6 EBDT 21 Tax rate 22 Debt aftertax cost 23 Debt weight 24 Preferred stock cost 25 Preferred stock weight 26 Common equity cost 27 Common equity weight 28 MACRS 5-year rates: 29 Year 1 30 Year 2 31 Year 3 32 Year 4 33 Year 5 34 Year 6 370,000 190,000 67,000 224,000 186,000 156,000 141,000 108,000 98,000 25% 5.20% 30% 9.80% 10% 14.00% 60% .200 .320 .192 .115 .115 .058

B48 =NPV(B46,B44:G44)-B12-B13 В Year 1 $224,000 $ 74,000 $150,000 $37,500 $112,500 $74,000 C Year 2 $186,000 $118,400 $67,600 $16,900 $50,700 $118,400 A 36 37 EBDT 38 Depreciation 39 EBT 40 Taxes 41 EAT 42 Depreciation 43 Net working capital recovery 44 Cash flow 45 46 WACC 47 48 NPV 49 Should the equipment be 50 purchased? D E F G Year 3 Year 4 Year 5 Year 6 $156,000 $141,000 $108,000 $98,000 $ 71,040 $42,550 $42,550 $21,460| $84,960 $98,450 $65,450 $76,540 $21,2401 $24,613 $16,363 $19,135 $63,7201 $73,838 $49,088 $57,405 $71,040 $42,550 $42,550 $21,460 $67,000 $134,760 $116,388 $91,638 $145,865 $186,500 $169,100 10.94% =ROUND(B22*B23+B24*B25+B26*B27,4) $ 53,800.49 Yes

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Depreciation Percentage Annual Base Depreciation Depreciation $ 370,000 0.200 $ 74,000 $ 370,000 0.320 $ 118,400 $ 370,000 0.192 $ 71,040 $ 370,000 0.115 $ 42,550 $ 370,000 0.115 $ 42,550 $ 370,000 0.058 $ 21,460 b) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 $ $ $ $ $ $ 186,500 169,100 134,760 116,388 91,638 145,865 c) 10.94% d-1) $53,800.49 d-2) Yes

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