Weighted Average Cost of Capital and Net Present Value Analysis 12i

Weighted Average Cost of Capital and Net Present Value Analysis Manchester Company is considering a proposal to purchase special equipment at a cost of$720,000. The equipment will be useful for five years and has an expected $75,000 salvage value. Manchester expects annual savings in cash operating expenses (before taxes) of $245,000. For tax purposes, the annual depreciation deduction will be as follows (salvage value is ignored on the tax return): Year 1 $90,000 Year 2 180,000 Year 3 180,000 Year 4 180,000 Year 5 90,000 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%