DataPoint Engineering is considering the purchase of a new piece of equipment fo
ID: 2737257 • Letter: D
Question
DataPoint Engineering is considering the purchase of a new piece of equipment for $250,000. It has an eight-year midpoint of its asset depreciation range (ADR). It will require an additional initial investment of $150,000 in nondepreciable working capital. Thirty-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.
The tax rate is 30 percent. The cost of capital must be computed based on the following:
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.)
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.)
Determine the weighted average cost of capital. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
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.)
DataPoint Engineering is considering the purchase of a new piece of equipment for $250,000. It has an eight-year midpoint of its asset depreciation range (ADR). It will require an additional initial investment of $150,000 in nondepreciable working capital. Thirty-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.
Explanation / Answer
Solution:
a.
Year
Depreciation
Percentage depreciation
Annual depreciation
1
250,000
0.2
50000
2
250,000
0.32
80000
3
250,000
0.192
48000
4
250,000
0.115
28750
5
250,000
0.115
28750
6
250,000
0.058
14500
250000
b.
Year
Cash flow
1
146600
2
137400
3
106800
4
90525
5
75825
6
101550
Cash flow from year 1 to year 5 = (EBDT – Depreciation) x (1 – tax rate) + D
Cash flow year 1 = ($188,000 – 50,000) x (1 – 0.30) + 50,000 = 146,600
Cash flow year 2 = ($162,000 – 80,000) x (1 – 0.30) + 80,000 = 137,400
Cash flow year 3 = ($132,000 – 48,000) x (1 – 0.30) + 48,000 = 106,800
Cash flow year 4 = ($117,000 – 28,750) x (1 – 0.30) + 28,750 = 90,525
Cash flow year 5 = ($96,000 – 28,750) x (1 – 0.30) + 28,750 = 75,825
Cash flow year 6 = (EBDT – Depreciation) x (1 – tax rate) + D + Recovery of working capital
Cash flow year 6 = (86,000 – 14,500) x (1 – 0.30) + 14,500 + 37,000 = 101,550
c.
Cost
Weights
Weighted
(Aftertax)
Debt
Kd
10.50%
30%
3.1500%
Preferred stock
kp
14.20%
10%
1.4200%
Common equity
ke
19%
60%
11.4000%
15.9700%
WACC = 15.97%
d-1.
Year
CF (Inflows)
PVIF @ 15.97%
PV
1
146,600
0.862292
126412
2
137,400
0.743547
102163.4
3
106,800
0.641155
68475.35
4
90,525
0.552863
50047.91
5
75,825
0.476729
36147.99
6
101,550
0.41108
41745.15
PV of inflows
424991.8
PV of outflows*
400000
NPV =
24991.81
*PV of outflows = $250,000 + $150,000 = $400,000
d-2: Yes, DataPoint should purchase the new equipment because NPV is positive.
Year
Depreciation
Percentage depreciation
Annual depreciation
1
250,000
0.2
50000
2
250,000
0.32
80000
3
250,000
0.192
48000
4
250,000
0.115
28750
5
250,000
0.115
28750
6
250,000
0.058
14500
250000
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