Weighted Average Cost of Capital and Net Present Value Analysis Manchester Company is considering a proposal to purchase special equipment at a cost of $680,000. The equipment will be useful for five years and has an expected $70,000 salvage value. Manchester expects annual savings in cash operating expenses (before taxes) of $240,000. For tax purposes, the annual depreciation deduction will be as follows (salvage value is ignored on the tax return): Year 1 $85,000 Year 2 170,000 Year 3 170,000 Year 4 170,000 Year 5 85,000 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 Correct % Common stock Answer Correct % Retained earnings Answer Correct % (1) Weighted avg. cost of capital Answer Correct % (2) Manchester's cut off rate: Answer Correct % 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 Correct $ Answer Incorrect Tax savings from depreciation Year 1 Answer Correct Answer Incorrect Year 2 Answer Correct Answer Incorrect Year 3 Answer Correct Answer Incorrect Year 4 Answer Correct Answer Incorrect Year 5 Answer Correct Answer Incorrect After-tax equipment sale proceeds Answer Correct Answer Incorrect Total present value of future cash flows Answer Incorrect Investment required in equipment Answer Incorrect Net positive (negative) present value $ Answer Incorrect Under the net present value analysis, should Manchester accept the proposal? Select the most appropriate answer below.