Not Graded

Weighted Average Cost of Capital and Net Present Value Analysis Tate Company is considering a proposal to acquire new equipment for its manufacturing division. The equipment will cost $222,000, be useful for four years, and have a $19,000 salvage value. Tate expects annual savings in cash operating expenses (before taxes) of $75,000. For tax purposes, the annual depreciation deduction will be $74,000, $99,400, $32,400, and $16,200, respectively, for the four years (the salvage value is ignored on the tax return). The income tax rate is 40%. Tate establishes a hurdle rate for a net present value analysis at the company's weighted average cost of capital plus 1 percentage point. Tate's capital is provided in the following proportions: debt, 60%; common stock, 20%; and retained earnings, 20%. The cost rates for these capital sources are debt, 10%; common stock, 12%; and retained earnings, 13%.

a. Compute Tate's (1) weighted average cost of capital and (2) hurdle rate. Round answers to one decimal place. For example, 0.4567 = 45.7%.

	Weighted Average Cost of Capital
Debt	Answer
Common stock	Answer
Retained earnings	Answer
(1) Weighted avg. cost of capital	Answer
(2) Tate's hurdle off rate:	Answer

b. Using Tate's hurdle rate, compute the net present value of this capital expenditure proposal. Round answers to the nearest whole number. Use rounded answers for subsequent calculations. Use a negative sign with net present value to indicate a negative amount. Otherwise do not use negative signs with your answers.

After-Tax Cash Flow Analysis
	Amount	Present Value
After-tax cash expense savings	Answer	Answer
Tax savings from depreciation
Year 1	Answer	Answer
Year 2	Answer	Answer
Year 3	Answer	Answer
Year 4	Answer	Answer
After-tax equipment sale proceeds	Answer	Answer
Total present value of future cash flows		Answer
Investment required in equipment		Answer
Net positive (negative) present value		Answer