DataPoint Engineering is considering the purchase of a new piece of equipment fo
ID: 2539121 • Letter: D
Question
DataPoint Engineering is considering the purchase of a new piece of equipment for $410,000. It has an eight-year midpoint of its asset depreciation range (ADR). It will require an additional initial investment of $230,000 in nondepreciable working capital. Seventy-seven thousand dollars 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.
The tax rate is 30 percent. The cost of capital must be computed based on the following:
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.)
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.)
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.)
The tax rate is 30 percent. The cost of capital must be computed based on the following:
Cost(aftertax) Weights Debt Kd 10.20 % 30 % Preferred stock Kp 12.50 20 Common equity (retained earnings) Ke 19.00 50
Explanation / Answer
a 8 year midpoint of ADR means 5 year MACRS depreciation a b a*b Year Depreciation Base 5 year MACRS Rate Depreciation 1 410000 20% 82000 2 410000 32% 131200 3 410000 19.20% 78720 4 410000 11.52% 47232 5 410000 11.52% 47232 6 410000 5.76% 23616 b Cashflow Year 1 2 3 4 5 6 Income before depreciation & taxes 236,000 194,000 164,000 149,000 112,000 102,000 Less:Deprecaition 82,000 131,200 78,720 47,232 47,232 23,616 Income before tax 154,000 62,800 85,280 101,768 64,768 78,384 Less:Tax @30% 46,200 18,840 25,584 30,530 19,430 23,515 Income after tax 107,800 43,960 59,696 71,238 45,338 54,869 Add:deprecciation 82,000 131,200 78,720 47,232 47,232 23,616 Working capiatl recovery 77,000 Cash flow 189,800 175,160 138,416 118,470 92,570 155,485 c A B C=A*B Cost after tax Weights Weighted cost Debt 10.2 30% 3.06 Prefered Stock 12.5 20% 2.50 Common Equity 19.0 50% 9.50 WACC 15.06 d NPV =NPV(RATE,CASHFLOW YEAR 1, CASHFLOW YEAR 2,…..)-Initial investment Initial Investment 640000 (410000+230000) NPV ($71,357.48) =NPV(15.06%,189800,175160,138416,118470,92570,155485)-640000
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