The equipment has a delivered cost of $$115,000.$ An additional $$3,000$ is required to install and test the

new system.

The new pumping system is classified by the IRS as $7-$year property with the same $7-$year estimated

service life. For assets classified by the IRS as $7-$year property, the Modified Accelerated Cost Recovery

System $($MACRS$)$ permits the company to depreciate the asset over $8$ years at the following rates: Year $1$

$=14\%$; Year $2=25\%$; Year $3=17\%$; Year $4=13\%$; Year $5=9\%$; Year $6=9\%$; Year $7=9\%$; Year $8=4\%.$

At the end of its estimated service life of $7$ years, the salvage value is expected to be $$8,000,$ with

removal costs of $$1,200.$

The existing pumping system was purchased at $$48,000$ five years ago and has been depreciated on a

straight$-$line basis over its economic life of $6$ years. If the existing system is removed from the well and

crated for pickup, it can be sold for $$4,200$ before tax. It will cost $$1,000$ to remove the system and crate

it$.$

$4.$At the time of replacement $(t=0),$ the firm will need to increase its net working capital requirements by

$$6,500$ to support inventories.

The new pumping system offers lower maintenance costs and frees personnel who would otherwise

have to monitor the system. In addition, it reduces product wastage because of a higher cooling

efficiency. In total, it is estimated that the yearly savings will amount to $$32,000$ if the new pumping system

is used.

$6.$FPC$\text{'}$s assets are financed by debt and common equity and has a target debt ratio of $30$ percent. Its

debt carries an interest rate of $6$ percent. The firm has paid $$2\mathrm{.}00$ of dividend per share this year $($D$0)$ and

expects a constant dividend growth rate of $5$ percent per year in the coming years. The firm's current

stock price, $P0,$ is $$28\mathrm{.}00.$ The firm uses its overall weighted average cost of capital in evaluating average

risk projects, and the replacement project is perceived to be of average risk.

The firm's federal$-$plus$-$state tax rate is $25$ percent, which is projected to remain fairly constant.

Please provide answers to the following four questions on the attached Cash Flow Estimation Worksheet.

You should show all your work with Excel formulas$/$equations for all computed numbers for Questions $1,2$

& $3,$ and concise and direct answers for Question #$4$ on the attached Cash Flow Estimation Worksheet

and answers to te tables at the bottom of your spreadsheet, whenever applicable. NO WORK SHOWN,

NO POINTS.

$(8$ pts$)$

Compute the firm's weighted average cost of capital given the info$/$data in the case. What other

approaches$/$methods can be used to measure the firm's cost of common equity and thus its WACC? To

that end, what additional info$/$data would you need? $($Hint$.$ A firm's weighted average cost of capital is

equal to KKaa$=WWdd(KKdd)(1-t)+$WWeeKKee, where $WWdd$ and WWee are the weights of debt and

equity in the capital structure; $KKdd$ and $KK$ are the respective costs of debt and equity; and $t$ is the

corporate tax rate; Do no round up your WACC figure.$)$

Develop a capital budgeting schedule using the attached Cash Flow Estimation Worksheet $($Excel

spreadsheet$)$ that should list all relevant cash flow items and amounts related to the replacement project

over the $7-$year expected life of the new pumping system. $($Reference Reading: "Cash Flow Analysis

Example $($RIC Project$)",$ one of required Readings for the course

Based on the capital budgeting schedule, evaluate the replacement project by

computing NPV$,$ IRR, MIRR, and Payback Period. Would you recommend to accept

or reject the replacement project based solely on your DCF analysis so far?

Before you make the final accept$/$reject decision, what other factors and approaches would you

consider further? Discuss also how to PRACTICALLY take into account those factors and approaches in

the capital budgeting decision process, whenever applicable. $($Reference Reading: $(1)$ Textbook Chapters

$11$ & $26$ and related parts of Class Notes; and $(2)$ "Capital Asset Management Process: the Case of Hose

& Fittings Corporation" by Bae et al$.,$ International Journal of Managerial Finance $($IJMF$),$ Vol. $1,$ No$.3,$

$2005,$ pp$.204-220,$ one of required Readings for the course.