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 Common stock 4 Retained earnings 06 1 .. (1) Weighted avg. cust of capital (2) Manchester's cut off rate: 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 Present Value Amount After tax cash expense savings 0 x Tax savings from depreciation Year Year 2 Year 3 x Year 4 Year 5 After-tax equipment sale proceeds Total present value of future cash flows 0 x Investment required in equipment Net positive (negative) present value Under the net present value analysis, should Manchester accept the proposal