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Purchase of new equipment

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DataPoint Engineering is considering the purchase of a new piece of equipment for $220,000. It has an eight-year midpoint of its asset depreciation range (ADR). It will require and additional initial investment of $120,000 in nondepreciable working capital. Thirty 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 e:
Year Amount
1 $170,000
2 150,000
3 120,000
4 105,000
5 90,000
6 80,000

The tax rate is 30 percent. The cost of capital must be computed based on the following (round the final value to the nearest whole number):
Cost (after tax) Weights
Debt Kd 6.5% 30%
Preferred stock Kp 10.2 10
Common equity (retained earnings Ke 15.0 60

But I am stuck on this homework problem.
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 datapoint purchase the new equipment?

All the data needed is on the attached document.

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DataPoint Engineering is considering the purchase of a new piece of equipment for $220,000. It has an eight-year midpoint of its asset
depreciation range (ADR). It will require and additional initial investment of $120,000 in nondepreciable working capital. Thirty
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 e:
Year Amount
1 $170,000
2 150,000
3 120,000
4 105,000
5 90,000
6 80,000

The tax rate is 30 percent. The cost of capital must be computed based on the following (round the final value to the nearest whole
number):
Cost (after ...

Solution Summary

The solution explains the calculation of depreciation, cash flow and cost of capital in making the purchase decision for a new equipment

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