Problem 12 32 Capital budgeting with cost of capital computation LO5 DataPoint Engineering is considering the purchase of a new piece of equipment for $380,000 It has an eight year midpoint of its asset depreciation range (ADR) It will require an additional initial investment of $200,000 in nondepreciable working capital Seventy thousand dollars 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 1212 Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods Year Amount 1 $ 227,000 2 188,000 3 158,000 4 143,000 5 109,000 6 99,000 The tax rate is 35 percent The cost of capital must be computed based on the following Cost (aftertax) Weights Debt K d 7 20 20 Preferred stock K p 11 80 5 Common equity (retained earnings) K e 16 00 75 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 $ 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 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 No Yes

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Problem 12-32 Capital budgeting with cost of capital computation [LO5] DataPoint Engineering is considering the purchase of a new piece of equipment for $380,000. It

Problem 12-32 Capital budgeting with cost of capital computation [LO5]

DataPoint Engineering is considering the purchase of a new piece of equipment for $380,000. It has an eight-year midpoint of its asset depreciation range (ADR). It will require an additional initial investment of $200,000 in nondepreciable working capital. Seventy thousand dollars 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 1212. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

Year	Amount
1	$	227,000
2		188,000
3		158,000
4		143,000
5		109,000
6		99,000

The tax rate is 35 percent. The cost of capital must be computed based on the following:

		Cost (aftertax)			Weights
Debt	K_d		7.20	%		20	%
Preferred stock	K_p		11.80			5
Common equity (retained earnings)	K_e		16.00			75

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

			$

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

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?