Data Point Engineering is considering the purchase of a new piece of equipment for $240,000. It has an eight-year midpoint of its asset depreciation range (ADR). It will require an additional initial investment of $140,000 in non-appreciable working capital. Thirty-five 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 years will be: The tax rate is 40 percent.

Year Amount

1 $185,000

2 160,000

3 130,000

4 115,000

5 95,000

6 85,000

The cost of capital must be computed based on the following (round the final value to the nearest whole number):

a. Determine the annual depreciation schedule.

b. Determine annual cash flow. Include recovered working capital in the sixth year.

c. Determine the weighted average cost of capital.

d. Determine the net present value. Should Data Point purchase the new equipment?

Transcribed Image Text:

Debt Preferred stock Common equity (retained earnings) *************** Ka Kp K₂ Cost (aftertax) Weights 25% 9.5% 13.2 18.0 25 50 Debt Preferred stock Common equity (retained earnings) *************** Ka Kp K₂ Cost (aftertax) Weights 25% 9.5% 13.2 18.0 25 50

Answer rating: 100% (QA)

a The given asset has 8 year midpoint and s per table 1211 this type of assets are cons... View the full answer