Weighted Average Cost of Capital and Net Present Value Analysis Manchester Company is considering a proposal to purchase special equipment at a cost of $740,000. The equipment will be useful for five years and has an expected $80,000 salvage value. Manchester expects annual savings in cash operating expenses (before taxes) of $250,000. For tax purposes, the annual depreciation deduction will be as follows (salvage value is ignored on the tax return):

Year 1	$92,500
Year 2	185,000
Year 3	185,000
Year 4	185,000
Year 5	92,500

The income tax rate is 40%. Manchester establishes a hurdle rate for a net present value analysis at the company's weighted average cost of capital plus 2 percentage points. Manchester's capital is provided in the following proportions: debt, 70%; common stock, 20%; and retained earnings, 10%. The cost rates for these capital sources are debt, 8%; common stock, 12%; and retained earnings, 10%.

a. Compute Manchester'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) Manchester's cut off rate:	Answer

b. Using Manchester'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
Year 5	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

Under the net present value analysis, should Manchester accept the proposal?

Select the most appropriate answer below.

Manchester should not accept the proposal, because its net present value is positive.

Manchester should accept the proposal, because its net present value is negative.

Manchester should accept the proposal, because its net present value is positive.

Manchester should not accept the proposal, because its net present value is negative.