Question

DataPoint Engineering is considering the purchase of a new piece of equipment for $210,000. It has an eight-year midpoint of its asset depreciation range (ADR). It will require an additional initial investment of $110,000 in nondepreciable working capital. $27,000 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	$	176,000
2		154,000
3		124,000
4		109,000
5		92,000
6		82,000

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

 

		Cost (aftertax)			Weights
Debt	Kd		6.40	%		40	%
Preferred stock	Kp		10.40			10
Common equity (retained earnings)	Ke		13.00			50

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.)
 

Answer 1

SOLUTION:-

D G H 2 An 8 year midpoint of its asset depreciation range (ADR) will be 5 year MACRS depreciation. Year 4 5 1 6 2 3 Annual Depreciation Depreciation Base % Depreciation Calculation $ 2,10,000.00 0.200 =C5*D5 $ 2,10,000.00 0.320 =C6*D6 $ 2,10,000.00 0.192 =C7*D7 $ 2,10,000.00 0.115 =C8*D8 $ 2,10,000.00 0.115=C9*D9 $ 2,10,000.00 0.058 =C10*D10 Annual Depreciation 42,000.00 67,200.00 40,320.00 24,150.00 24.150.00 12,180.00 $ $ $ $ $ $ 7 8 4 9 5 6 10 11 b) 1 $ $ $ 1,76,000.00 $ 42,000.00 $ 1.34,000.00 $ 2 1,54,000.00 $ 67,200.00 $ 86,800.00 $ 3 1,24,000.00 $ 40,320.00 $ 83,680.00 $ 4 5 6 1,09,000.00 $ 92,000.00 $ 82,000.00 24,150.00 $ 24,150.00 $ 12,180.00 84,850.00 $ 67,850.00 $ 69,820.00 12 13 14 15 16 17 18 19 20 21 Year Income before Depreciation and Taxes Less: Depreciation Income after Depreciation (Income before Depreciation and Taxes - Depreciation) Tax @ 25% (Income after Depreciation * 25% Income After Tax (Income after Depreciation - Tax) Add : Depreciation Add: Recovery of Working Capital Cash Flow After Tax (Income after Tax + Depreciation + Recovery of Working Capital) $ $ $ 33,500.00 $ 1,00,500.00 $ 42,000.00 $ 21,700.00 $ 65,100.00 $ 67,200.00 $ 20,920.00 $ 62,760.00 $ 40,320.00 $ 21,212.50 $ 16,962.50 $ 17,455.00 63,637.50 $ 50,887.50 $ 52,365.00 24,150.00 $ 24,150.00 $ 12,180.00 $ 27,000.00 87,787.50 $ 75,037.50 $ 91,545.00 $ 1,42,500.00 $ 1,32,300.00 $ 1,03,080.00 $ 22 23

А B D E F 23 c) 24 25 26 27 28 Weighted Average Cost of Capital = Cost of Debt * Weight of Debt + Cost of Preferred Stock* Weight of Preferred Stock + Cost of Common Equity * Weight of Common Equity = 6.40% * 40% + 10.40% * 10% + 13% * 50% = 2.56% + 1.04% + 6.5% = 10.10% 29 30 31 d-1) Year 0 32 1 2 3 4 5 6 $ $ $ $ $ $ $ Cash Flow 3,20,000.00 1,42,500.00 1,32,300.00 1,03,080.00 87,787.50 75,037.50 91,545.00 33 34 35 36 37 38 39 40 41 42 WACC 10.10% Formula NPV =C31+NPV(C39,C32:C37) $ 1,53,320.28 43 44 45 46 47

Answer 2

D G H 2 An 8 year midpoint of its asset depreciation range (ADR) will be 5 year MACRS depreciation. Year 4 5 1 6 2 3 Annual Depreciation Depreciation Base % Depreciation Calculation $ 2,10,000.00 0.200 =C5*D5 $ 2,10,000.00 0.320 =C6*D6 $ 2,10,000.00 0.192 =C7*D7 $ 2,10,000.00 0.115 =C8*D8 $ 2,10,000.00 0.115=C9*D9 $ 2,10,000.00 0.058 =C10*D10 Annual Depreciation 42,000.00 67,200.00 40,320.00 24,150.00 24.150.00 12,180.00 $ $ $ $ $ $ 7 8 4 9 5 6 10 11 b) 1 $ $ $ 1,76,000.00 $ 42,000.00 $ 1.34,000.00 $ 2 1,54,000.00 $ 67,200.00 $ 86,800.00 $ 3 1,24,000.00 $ 40,320.00 $ 83,680.00 $ 4 5 6 1,09,000.00 $ 92,000.00 $ 82,000.00 24,150.00 $ 24,150.00 $ 12,180.00 84,850.00 $ 67,850.00 $ 69,820.00 12 13 14 15 16 17 18 19 20 21 Year Income before Depreciation and Taxes Less: Depreciation Income after Depreciation (Income before Depreciation and Taxes - Depreciation) Tax @ 25% (Income after Depreciation * 25% Income After Tax (Income after Depreciation - Tax) Add : Depreciation Add: Recovery of Working Capital Cash Flow After Tax (Income after Tax + Depreciation + Recovery of Working Capital) $ $ $ 33,500.00 $ 1,00,500.00 $ 42,000.00 $ 21,700.00 $ 65,100.00 $ 67,200.00 $ 20,920.00 $ 62,760.00 $ 40,320.00 $ 21,212.50 $ 16,962.50 $ 17,455.00 63,637.50 $ 50,887.50 $ 52,365.00 24,150.00 $ 24,150.00 $ 12,180.00 $ 27,000.00 87,787.50 $ 75,037.50 $ 91,545.00 $ 1,42,500.00 $ 1,32,300.00 $ 1,03,080.00 $ 22 23

А B D E F 23 c) 24 25 26 27 28 Weighted Average Cost of Capital = Cost of Debt * Weight of Debt + Cost of Preferred Stock* Weight of Preferred Stock + Cost of Common Equity * Weight of Common Equity = 6.40% * 40% + 10.40% * 10% + 13% * 50% = 2.56% + 1.04% + 6.5% = 10.10% 29 30 31 d-1) Year 0 32 1 2 3 4 5 6 $ $ $ $ $ $ $ Cash Flow 3,20,000.00 1,42,500.00 1,32,300.00 1,03,080.00 87,787.50 75,037.50 91,545.00 33 34 35 36 37 38 39 40 41 42 WACC 10.10% Formula NPV =C31+NPV(C39,C32:C37) $ 1,53,320.28 43 44 45 46 47