Weighted Average Cost of Capital and Net Present Value Analysis Manchester Company is considering a proposal to purchase special equipment at a cost of $640,000. The equipment will be useful for five years and has an expected $60,000 salvage value. Manchester expects annual savings in cash operating expenses (before taxes) of $230,000. For tax purposes, the annual depreciation deduction will be as follows (salvage value is ignored on the tax return):

Year 1	$80,000
Year 2	160,000
Year 3	160,000
Year 4	160,000
Year 5	80,000

The income tax rate is 40%. Manchester establishes a cutoff 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) cutoff 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 cutoff 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