Question

DataPoint Engineering is considering the purchase of a new piece of equipment for $290,000. It has an eight-year midpoint of its asset depreciation range (ADR). It will require an additional initial investment of $190,000 in nondepreciable working capital. $47,000 of this investment will be recovered after the sixth year and will provide additional cash flow for that year. Income before depreciation and taxes for the next six are shown in the following table. Use Table 12–11, Table 12–12. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

Year	Amount
1	$	200,000
2		170,000
3		140,000
4		125,000
5		100,000
6		90,000

The tax rate is 25 percent. The cost of capital must be computed based on the following:

The tax rate is 25 percent. The cost of capital must be computed based on the following:

		Cost (aftertax)			Weights
Debt	Kd		5.30	%		30	%
Preferred stock	Kp		9.40			10
Common equity (retained earnings)	Ke		14.00			60
a. Determine the annual depreciation schedule. (Do not round intermediate calculations. Round your depreciation base and annual depreciation answers to the nearest whole dollar. Round your percentage depreciation answers to 3 decimal places.) b. Determine the annual cash flow for each year. Be sure to include the recovered working capital in Year 6. (Do not round intermediate calculations and round your answers to 2 decimal places.) Year Cash Flow 1 $0 2 0 3 0 4 0 5 0 6 0 c. Determine the weighted average cost of capital. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Weighted average cost of capital 0.00 % d-1. Determine the net present value. (Use the WACC from part c rounded to 2 decimal places as a percent as the cost of capital (e.g., 12.34%). Do not round any other intermediate calculations. Round your answer to 2 decimal places.) Net present value $0.00 Answer A is correct only need the rest answered thanks!

Answer 1

a. 8-year midpoint of ADR leads to 5-year MACRS depreciation

Year	Depreciation Base	Percentage Depreciation	Annual Depreciation
1	290000	0.2	58000
2	290000	0.32	92800
3	290000	0.192	55680
4	290000	0.115	33350
5	290000	0.115	33350
6	290000	0.058	16820
			290000

b. Annual cash flow

Year	1	2	3	4	5	6
EBDT	200000	170000	140000	125000	100000	90000
Less: Dep.	58000	92800	55680	33350	33350	16820
EBT	142000	77200	84320	91650	66650	73180
Tax @ 25%	35500	19300	21080	22913	16663	18295
EAT	106500	57900	63240	68737	49987	54885
Add: Dep.	58000	92800	55680	33350	33350	16820
Recovery of working capital						47000
Cash Flow	164500	150700	118920	102087	83337	118705

c. Weighted average cost of capital

		Cost	Weights	Weighted
Debt	Kd	5.30%	30%	1.59%
Preferred stock	Kp	9.40%	10%	0.94%
Common equity (retained earnings)	Ke	14%	60%	8.40%
Weighted average cost of capital	10.93%

d. Net present value

Year	Cash Flow (inflows)	PVIF @ 10.93%	Present Value
1	164500	0.90147	148291.72
2	150700	0.81265	122465.91
3	118920	0.73258	87117.99
4	102087	0.66040	67417.77
5	83337	0.59533	49612.69
6	118705	0.53667	63705.21
Present value of inflows	538611.29
Present value of outflows	480000.00
Net present value	58611.29