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 1 Amount $ 224,000 2 186,000 3 156,000 4 141,000 5 6 108,000 98,000 The tax rate is 25 percent. The cost of capital must be computed based on the following: Debt Preferred stock Common equity (retained earnings) Kd Cost (aftertax) 5.20% 9.80 Weights 30% Ke 14.00 10 60 a. Determine the annual depreciation schedule. Note: 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 $ 370,000 0.200 $ 74,000 2 370,000 0.320 118,400 3 370,000 0.192 71,400 4 370,000 0.115 42,550 5 370,000 0.115 42,550 6 370,000 0.058 21,460 $ 370,360 b. Determine the annual cash flow for each year. Be sure to include the recovered working capital in Year 6. Note: Do not round intermediate calculations and round your answers to 2 decimal places. Year Cash Flow 1 $ 186,500 2 169,100 3 134,760 4 116,388 5 91,638 6 145,865 c. Determine the weighted average cost of capital. Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Weighted average cost of capital 10.94 % d-1. Determine the net present value. Note: 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? Yes No Table 12-11 Categories for depreciation write-off Class 3-year MACRS All property with ADR midpoints of 4 years or less. Autos and light trucks are excluded from this category. 5-year MACRS 7-year MACRS Property with ADR midpoints of more than 4, but less than 10 years. Key assets in this category include automobiles, light trucks, and technological equipment such as computers and research-related properties. Property with ADR midpoints of 10 years or more, but less than 16 years. Most types of manufacturing equipment would fall into this category, as would office furniture and fixtures. 10-year MACRS Property with ADR midpoints of 16 years or more, but less than 20 years. Petroleum refining products, railroad tank cars, and manufactured homes fall into this group. 15-year MACRS 20-year MACRS 27.5-year MACRS 31.5-year MACRS 39-year MACRS Property with ADR midpoints of 20 years or more, but less than 25 years. Land improvement, pipeline distribution, telephone distribution, and sewage treatment plants all belong in this category. Property with ADR midpoints of 25 years or more (with the exception of real estate, which is treated separately). Key investments in this category include electric and gas utility property and sewer pipes. Residential rental property if 80 percent or more of the gross rental income is from nontransient dwelling units (e.g., an apartment building); low-income housing. Nonresidential real property that has no ADR class life or whose class life is 27.5 years or more. Nonresidential real property placed in service after May 12, 1993. Depreciation Year Table 12-12 Depreciation percentages (expressed in decimals) 3-Year 5-Year 7-Year 10-Year 15-Year 20-Year MACRS MACRS MACRS MACRS MACRS MACRS 1 0.333 0.200 0.143 0.100 0.050 0.038 2 0.445 0.320 0.245 0.180 0.095 0.072 3 0.148 0.192 0.175 0.144 0.086 0.067 4 0.074 0.115 0.125 0.115 0.077 0.062 5 0.115 0.089 0.092 0.069 0.057 6 0.058 0.089 0.074 0.062 0.053 7 0.089 0.066 0.059 0.045 8 0.045 0.066 0.059 0.045 9 0.065 0.059 0.045 10 0.065 0.059 0.045 11 0.033 0.059 0.045 12 0.059 0.045 13 0.059 0.045 14 0.059 0.045 15 0.059 0.045 16 0.030 0.045 17 0.045 18 0.045 19 0.045 20 0.045 21 0.017 1.000 1.000 1.000 1.000 1.000 1.000 Appendix B Present value of $1, PV IF PV=FV[1 / (1 + i)"] Percent Period 1% 2% 3% 1 0.990 0.980 2 0.980 0.961 0.971 0.943 4% 0.962 0.925 5% 6% 7% 0.952 0.943 0.935 0.907 0.890 0.873 3 4 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.961 0.924 0.888 0.855 0.823 5 0.951 6 7 8 9 10 0.744 0.676 11 12 13 17 18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 19 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 20 25 0.820 0.673 0.554 0.456 0.377 0.312 0.780 0.610 0.478 0.375 0.295 0.233 30 40 50 0.608 0.372 0.228 0.141 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218 0.188 0.163 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198 0.170 0.146 0.212 0.180 0.153 0.130 0.194 0.164 0.138 0.116 0.178 0.149 0.124 0.104 0.116 0.092 0.074 0.059 0.742 0.552 0.412 0.308 0.231 0.174 0.131 0.099 0.075 0.057 0.044 0.033 0.672 0.453 0.307 0.208 0.142 0.097 0.067 0.046 0.032 0.022 0.087 0.054 0.034 0.021 0.013 0.009 0.356 0.326 0.299 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 25% 30% 35% 40% 50% 0.926 0.917 0.909 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 0.800 0.769 0.741 0.714 0.667 0.857 0.842 0.826 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694 0.640 0.592 0.549 0.510 0.444 0.794 0.772 0.751 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579 0.512 0.455 0.406 0.364 0.296 0.792 0.763 0.735 0.708 0.683 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.515 0.499 0.482 0.410 0.350 0.301 0.260 0.198 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402 0.328 0.269 0.223 0.186 0.132 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335 0.262 0.207 0.165 0.133 0.088 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279 0.210 0.159 0.122 0.095 0.059 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233 0.168 0.123 0.091 0.068 0.039 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194 0.134 0.094 0.067 0.048 0.026 0.905 0.820 0.614 0.558 0.508 0.463 0.422 0.386 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162 0.107 0.073 0.050 0.035 0.017 0.350 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135 0.086 0.056 0.037 0.025 0.012 0.319 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112 0.069 0.043 0.027 0.018 0.008 0.290 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093 0.055 0.033 0.020 0.013 0.005 0.263 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078 0.044 0.025 0.015 0.009 0.003 0.275 0.239 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.065 0.035 0.020 0.011 0.006 0.002 0.258 0.215 0.184 0.146 0.005 0.003 0.002 0.015 0.011 0.008 0.005 0.004 0.003 0.002 0.001 0.001 0.001 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054 0.028 0.015 0.008 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045 0.023 0.012 0.006 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038 0.018 0.009 0.005 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031 0.014 0.007 0.003 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026 0.012 0.005 0.002 0.001 0.047 0.038 0.030 0.024 0.020 0.016 0.013 0.010 0.004 0.001 0.026 0.020 0.015 0.012 0.009 0.007 0.005 0.004 0.001 0.001 0.001 0.005 0.002 0.003 0.001 0.002 0.001 0.002 0 0 0.001 0 0 0 0 0 0 0.001 0 0 0 0 0 0 0 0 0 0 0 0 0 0