DataPoint Engineering is considering the purchase of a new piece of equipment fo
ID: 2721047 • Letter: D
Question
DataPoint Engineering is considering the purchase of a new piece of equipment for $380,000. It has an eight-year midpoint of its asset depreciation range (ADR). It will require an additional initial investment of $200,000 in nondepreciable working capital. Seventy 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. Year Amount 1 $ 227,000 2 188,000 3 158,000 4 143,000 5 109,000 6 99,000 The tax rate is 35 percent. The cost of capital must be computed based on the following: Cost (aftertax) Weights Debt Kd 7.20 % 20 % Preferred stock Kp 11.80 5 Common equity (retained earnings) Ke 16.00 75 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.) 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 $ d-2. Should DataPoint purchase the new equipment? No Yes
Explanation / Answer
a) Depreciation schedule: 8 year mid point ADR leads to year MACRS annual year depn base depn % depn 1 380000 20.0 76000 2 380000 32.0 121600 3 380000 19.2 72960 4 380000 11.5 43700 5 380000 11.5 43700 6 380000 5.8 22040 380000 b) Annual Cash Flow: 1 2 3 4 5 6 EBDT 227000 188000 158000 143000 109000 99000 depn 76000 121600 72960 43700 43700 22040 EBT 151000 66400 85040 99300 65300 76960 tax at 35% 52850 23240 29764 34755 22855 26936 EAT 98150 43160 55276 64545 42445 50024 depn 76000 121600 72960 43700 43700 22040 NWC recovery 70000 Cash flow 174150 164760 128236 108245 86145 142064 3) WACC: specific cost weight WACC-% equity 16 0.75 12.00 preferred 11.8 0.05 0.59 debt 7.2 0.20 1.44 14.03 4) NPV: cash flow 174150 164760 128236 108245 86145 142064 pvif @ 14.03% 0.8770 0.7691 0.6744 0.5915 0.5187 0.4549 pv 152723 126711 86487 64022 44682 64620 Sum of PVs 539246 Initial investment 580000 NPV -$40754 Decision: Data Point should not purchase the new equipment as the NPV is negative.
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