Question

DataPoint Engineering is considering the purchase of a new piece of equipment for $410,000. It has an eight-year midpoint of its asset depreciation range (ADR). It will require an additional initial investment of $230,000 in nondepreciable working capital. Seventy-seven thousand dollars 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	$	236,000
2		194,000
3		164,000
4		149,000
5		112,000
6		102,000
The tax rate is 30 percent. The cost of capital must be computed based on the following: Cost (aftertax) Weights Debt Kd 10.20 % 30 % Preferred stock Kp 12.50 20 Common equity (retained earnings) Ke 19.00 50

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.)

c. Determine the weighted average cost of capital. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

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.)

Answer 1

	a 8 year midpoint of ADR means 5 year MACRS depreciation
		a	b	a*b
	Year	Depreciation Base	5 year MACRS Rate	Depreciation
	1	410000	20%	82000
	2	410000	32%	131200
	3	410000	19.20%	78720
	4	410000	11.52%	47232
	5	410000	11.52%	47232
	6	410000	5.76%	23616
	b Cashflow
	Year	1	2	3	4	5	6
	Income before depreciation & taxes	236,000	194,000	164,000	149,000	112,000	102,000
	Less:Deprecaition	82,000	131,200	78,720	47,232	47,232	23,616
	Income before tax	154,000	62,800	85,280	101,768	64,768	78,384
	Less:Tax @30%	46,200	18,840	25,584	30,530	19,430	23,515
	Income after tax	107,800	43,960	59,696	71,238	45,338	54,869
	Add:deprecciation	82,000	131,200	78,720	47,232	47,232	23,616
	Working capiatl recovery						77,000
	Cash flow	189,800	175,160	138,416	118,470	92,570	155,485
	c	A	B	C=A*B
		Cost after tax	Weights	Weighted cost
	Debt	10.2	30%	3.06
	Prefered Stock	12.5	20%	2.50
	Common Equity	19.0	50%	9.50
			WACC	15.06
	d
	NPV =NPV(RATE,CASHFLOW YEAR 1, CASHFLOW YEAR 2,…..)-Initial investment
	Initial Investment	640000	(410000+230000)
	NPV	($71,357.48)	=NPV(15.06%,189800,175160,138416,118470,92570,155485)-640000