mported From Edge Saved DataPoint Engineering is considering the purchase of a new piece of equipment for $215,000. It has an eight-year midpoint of its asset depreciation range (ADR). It will require an additional initial investment of $220,000 in nondepreciable working capital. $75,000 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 2 3 4 5 6 Amount $233,000 192,000 162,000 147,000 111,000 101,080 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) 8.20% 12.80 17.00 Weights 55% 10 35 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.) 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 $ k6 Saved 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 % 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? O Yes BE search Table 12-11 Categories for depreciation write-off Class 3-year MACRS All property with ADR midpoints of four years or less. Autos and light trucks are excluded from this category. 5-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 techno- logical equipment such as computers and research-related properties. 7-year MACRS 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 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. 20-year MACRS Property with ADR midpoints of 25 years or more (with the exception of real estate, which is treated separately). Key investments in this cat- egory include electric and gas utility property and sewer pipes. 27.5-year Residential rental property if 80% or more of the gross rental income is MACRS from nontransient dwelling units (e.g., an apartment building); low- income housing 31.5-year Nonresidential real property that has no ADR class life or whose class MACRS life is 27.5 years or more. 39-year MACRS Nonresidential real property placed in service after May 12, 1993. Table 12-12 Depreciation percentages (expressed in decimals) Depreciation Year 3-Year MACRS 5-Year MACRS 7-Year MACRS 10-Year MACRS 15-Yoar MACRS 20-Year MACRS 0.100 2 3 0.333 0.445 0.148 0.074 0.200 0.320 0.192 0.115 0.115 0.058 0.038 0.072 0.067 0.062 4 0.143 0.245 0.175 0.125 0.089 0.089 0.089 0.045 0.050 0.095 0.086 0.077 0.069 0.062 0.180 0.144 0.115 0.092 0.074 0.066 5 0.057 0.053 6 7 0.059 8 0.066 0.059 9 10 0.065 0.065 0.033 11 12 0.059 0.059 0.059 0.059 0.059 0.059 0.059 0.030 13 14 15 16 17 0.045 0.045 0.045 0.045 0.045 0.045 0.045 0.045 0.045 0.045 0.045 0.045 0.045 0.045 0.017 1.000 RE 18 19 20 21 1.000 1.000 1.000 1.000 1.000 Appendix B Present value of $1. PV PV = FY Percent Period 1 2 0.990 0.980 0.971 0.980 0.961 0.942 3 0.971 0.943 0.915 0.888 0.863 0.837 7% 0.935 0.873 0.816 0.763 0.713 0.666 0.623 0.962 0.925 0.889 0.855 0.822 0.790 0.760 0.731 0.703 0.676 5% 0.952 0.907 0.864 0.823 0.784 0.746 0.711 0.677 0.645 0.614 0.961 0.951 0.942 0.933 0.923 5 89 0.926 0.857 0.794 0.735 0.681 0.630 0.583 0.540 10% 0.909 0.826 0.751 0.683 0.621 0.564 0.924 0.906 0.888 0.871 0.853 9 0.917 0.842 0.772 0.708 0.650 0.596 0.547 0.502 0.460 0.422 0901 0.812 0.731 0.659 0.593 0.535 6 0.893 0.797 0.712 0.636 0.567 0.507 0.452 0.404 7 0.813 0.789 8 0.482 0.434 0.582 0.513 0.467 0.424 9 10 0.914 0.905 0.896 6% 0.943 0.890 0.840 0.792 0.747 0.705 0.665 0.627 0.592 0.558 0.527 0.497 0.469 0.442 0.417 0.394 0.371 0.350 0.766 0.744 0.361 0.322 0.837 0.820 0.804 0.788 0.773 11 12 0.722 0.701 0.681 0.544 0.508 0.475 0.444 0.415 0.388 0.362 0.500 0.463 0.429 0.397 0.368 0.388 0.356 0.326 0.391 0.352 0.317 0 296 0.258 0.887 0.879 0.870 0.861 0.853 0.844 0.836 13 14 15 0.758 0.743 0.650 0.625 0.601 0.577 0.555 0.534 0.513 0.494 0.475 0.456 0.585 0.557 0.530 0.505 0.481 0.458 0.436 0.416 0.396 0.377 0.661 0.642 0.623 0.605 0.587 16 17 0.232 0.209 0.188 0.170 0.153 0.728 0.714 0.700 0.686 0.673 18 0.386 0.350 0.319 0.290 0.263 0.239 0.218 0.198 0.180 0.164 0.149 0.092 0.057 0.022 0.009 19 0.287 0.257 0.229 0.205 0.183 0.163 0.146 0.130 0.116 0.104 0.059 0.033 0.011 0.003 0.570 0.554 0.340 0.315 0.292 0.270 0.250 0.232 0.215 0.146 0.099 0.046 0.021 0.339 0.317 0.296 0.277 0.258 0.184 0.131 0.067 0.034 0.299 0.275 0.252 0.231 0.212 0.194 0.178 0.116 0.075 0.032 0.013 0.828 0.820 0.780 0.742 0.672 0.608 20 25 30 0.138 0.124 0.074 0.044 0.331 0.312 0.233 0.174 0.097 0.054 0.375 0.308 0.610 0.552 0.453 0.372 0.478 0.412 0.307 0.228 0.295 0.231 0.142 0.087 40 50 0.208 0.141 0.015 0.005 Appendix B (concluded) Present value of $1 Percent Period 20 2 3 0.833 0.694 0.579 30 0,769 0.592 0.455 0350 0269 4 10 0.840 0.706 0.593 0.499 0.419 0.352 0.296 0249 0.482 5 0.207 7 0.402 .335 0.279 0.233 16 0862 0.743 0,641 0.552 0.476 0.410 0.354 0.305 0.263 0.227 0.195 0.168 0.145 0.125 0.108 1x 0.847 0.718 0.609 0.515 0.437 0.370 0, 314 0.266 0.225 0.191 0.162 0.137 0.116 8 149 0.877 0.769 0.675 0.592 0.519 0.456 0.400 0.351 0.308 0.270 0.237 . 208 . 182 . 160 . 140 0.123 0.108 0.095 0.083 0.073 9 10 1s 0.870 0.756 0.658 0.572 0.497 0.432 0.376 0.327 0.284 . 247 0.215 0.187 0.163 0.141 0.123 0.107 0.093 0.081 0.070 0.061 0.030 0.015 .885 0.783 0.693 0.613 o 543 0.480 0.425 0.376 0.333 0.295 . 261 0.231 . 204 0.181 0.160 0.141 0.125 0.111 0.098 .087 0.047 0.026 0.008 0.002 11 17 0855 0.731 0.624 0.534 0.456 0.390 0.333 0.285 0.243 0, 208 0.178 . 152 0.130 0.111 0.095 0.08 1 0.069 0.059 0.051 0.043 0.020 0667 0.444 0 296 0.198 0.132 0.088 059 0.039 0.026 0.017 0.012 0.008 0.005 12 28 0.800 0.640 0.512 0.410 0.328 0 262 0,210 0, 168 0.134 0.107 0.086 0.069 0.055 0.044 0.035 0.028 0.023 0.018 0.014 0.012 0.004 0.001 0 3 0.741 0.549 0406 0.301 0223 0.165 0.122 0.091 0.067 0.050 0.037 0.027 0.020 0.015 0.011 0.008 0.006 0.005 0.003 0.002 0.001 0.159 0, 123 0.094 0.073 0.056 0.043 0.033 0.025 0.020 0.015 0.012 0.194 0.162 0.135 0.1 12 0.093 0.078 0.065 0.054 0.045 0714 0 510 0.364 0 260 0.186 0.133 0.095 0.068 0.048 0.035 0.025 0.018 0.013 .009 0.006 0.005 0.003 0.002 0.002 0.001 13 . 209 0.176 0.148 0.124 0.104 0.088 0.074 0.062 0.052 0.044 0.037 0.031 0.013 0.005 14 15 16 17 0.093 0.000 0.099 0.084 0.071 0.060 0.051 0.043 0.037 0.016 0,007 .003 0.002 0.002 0.001 0.001 18 19 0 0.069 0.060 .051 0.024 0.012 20 25 30 0.038 0,031 0.026 0.010 0.004 0.009 0.007 0.00s 0.001 0.038 0.020 o o o o 0.009 0.002 0.001 40 50 0.001 0.005 0.001 0.004 0.001 0.003 0.001 0 001