O V O mybusinesscourse.com C Calendar mbwe Managerial Accounting for Undergraduates, 2e + E N B ) Auto Zoom 516 a. Compute Manchester's (1) weighted average cost of capital and (2) hurdle rate. Search by term or phrase b. Using Manchester's hurdle rate, compute the net present value of this capital expenditure pro- Search book... posal. Under net present value analysis, should Manchester accept the proposal? EXTENDING YOUR KNOWLEDGE EYK12-1. Business Decision Case New Haven Corporation recently identified an investment opportunity involving the purchase of a patent that will permit the company to modify its line of CD recorders. The patent's purchase price is $720,000 and the legal protection it provides will last for five more years; there is no salvage value. However, after preparing the capital expenditure analysis below, New Haven's treasurer has recommended to the company's capital budgeting committee that the investment be rejected. Brad Decker, chairperson of the capital budgeting committee, finds it diffi- cult to accept the treasurer's analysis because he "feels intuitively" that the investment is attractive. For this reason, he has retained you to review the treasurer's analysis and recommendation. You are provided with the following data and summary of the treasurer's analysis: 1. Required investment: $720,000 cash for the patent to be amortized on a straight-line basis, = V I] E mybusinesscourse.com C; r11 33': I Managerial Accounting for Undergraduates, 2e awe-o-o Search by term or phrase ' Search book... ' i i 0 Cambridge Business Publishers Chapter 12 Capital Budgeting 51 1 4. Income taxes: New Haven has an overall income tax rate of 30%. 5. Treasurer's analysis: Average cost of capital (8% + 9% + 10%)l3 = 9% Total cash revenue .............................. $2,030,000 Total cash expenses. $740,000 Total amortization ...... 720,000 Total operating expenses ......................... 1,460,000 Projected net income over five years ................ $ 570,000 Average annual income .......................... $ 114,000