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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).
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 1211, 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 $224,000 2 186,000 3 156,000 4 141,000 5 108,000 6 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) Cost (aftertax) Weights Kd 5.20% 30% 9.80 10 14.00 60 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 1 2 3 4 5 6 Answer is complete and correct. Depreciation Percentage Annual Base Depreciation Depreciation $ 370,000 0.200 $ 74,000 370,000 0.320 118,400 370,000 0.192 71,040 370,000 0.115 42,550 370,000 0.115 42,550 370,000 0.058 21,460 $ 370,000 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.) Answer is complete and correct. Year 1 2 3 Cash Flow $ 186,500 169,100 134,760 116,388 91,638 145,865 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.) Answer is complete and correct. Weighted average cost 10.94% of capital d-1. Determine the net ent value. (Use the WACC from c rounded to 2 decimal places 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 is not complete. Net present value d-2. Should DataPoint purchase the new equipment? Yes No
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