A company has determined that its optimal capital structure consists of 40% debt and 60% equity. The before tax cost of debt is 10%; the tax rate is 40%. The costs of retained earnings and new common shares are 8.00% and 9.41%, respectively. Net income is expected to be $40,000, and the dividend payout ratio is 50%. When the firm's capital budget is $40,000, its weighted average cost of capital is: Since the focus of capital budgeting is on cash flows rather than on net income, changes in noncash balance sheet accounts such as inventory are not relevant. If an investment project would make use of land which the firm currently owns, the project should be charged with the opportunity cost of the land. Any cash flow that cannot be classified as incremental is relevant in a capital budgeting project analysis. In cash flow estimation, the presence of externalities has no direct cash flow effects. Use the following data to answer Questions 12-15. The president of Real Time, Inc. is considering the acquisition of a new computer. It costs $50,000, and falls into the MACRS 3-year class. Its purchase would require an increase in net working capital of $2,000. It would increase the firm's before-tax revenues by $20,000 per year, but would also increase operating costs by $5,000 per year. The computer is expected to be used for 3 years and then to be sold for $25,000. The firm's marginal tax rate is 40%, and the project's cost of capital is 14%. The net cash flow in Year 0 is: The depreciation charge in Year 1 will be