1 B C D E G H I J K M N 0 P Q 3M...

Transcribed Image Text:

1 B C D E G H I J K M N 0 P Q 3M is considering the purchase of a new piece of equipment for $260,000. The equipment depreciation will rely on the 5-year MACRS scale. An additional initial investment of $160,000 in non-depreciable working capital is required for delivery and installment. $40,000 of this investment will be recovered after the sixth year, providing extra cash flow for that year. The table below shows the income before depreciation and taxes for the next six years. 2 3 Year Amount 1 4 $191,000 2 5 $164,000 3 $134,000 7 $119,000 B 9 10 456 $97,000 $87,000 11 Additionally, 3M falls within the 25 percent tax bracket. It's debt, common stock, and preferred stock before-tax costs and weights are as follows: 12 Cost Weights 13 Debt Kd 8.77% 30% 14 Preferred stock Kp 11.6% 10% 15 Common Stock Ke 16% 60% 16 17 18 A: Determine the annual depreciaiton schedule for this equipment. 19 20 B: Calculate the annual cash flow for each year. 21 22 C: What is 3M's weighted average cost of capital? 23 24 D: What is the anticipated NPV for acquiring this new equipment? 25 26 E: The purchase price and depreciation values will affect which of the financial statements. Thoughtfully and thoroughly explain your answer. 27 28 1 B C D E G H I J K M N 0 P Q 3M is considering the purchase of a new piece of equipment for $260,000. The equipment depreciation will rely on the 5-year MACRS scale. An additional initial investment of $160,000 in non-depreciable working capital is required for delivery and installment. $40,000 of this investment will be recovered after the sixth year, providing extra cash flow for that year. The table below shows the income before depreciation and taxes for the next six years. 2 3 Year Amount 1 4 $191,000 2 5 $164,000 3 $134,000 7 $119,000 B 9 10 456 $97,000 $87,000 11 Additionally, 3M falls within the 25 percent tax bracket. It's debt, common stock, and preferred stock before-tax costs and weights are as follows: 12 Cost Weights 13 Debt Kd 8.77% 30% 14 Preferred stock Kp 11.6% 10% 15 Common Stock Ke 16% 60% 16 17 18 A: Determine the annual depreciaiton schedule for this equipment. 19 20 B: Calculate the annual cash flow for each year. 21 22 C: What is 3M's weighted average cost of capital? 23 24 D: What is the anticipated NPV for acquiring this new equipment? 25 26 E: The purchase price and depreciation values will affect which of the financial statements. Thoughtfully and thoroughly explain your answer. 27 28