DataPoint Engineering

September 7, 2019/in Questions Uploads /by Hannah Wangui

Question

DataPoint Engineering is considering the purchase of a new piece of equipment for $260,000. It has an eight-year

midpoint of its asset depreciation range (ADR). It will require an additional initial investment of $160,000 in nondepreciable working capital. Forty 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	$	191,000
2		164,000
3		134,000
4		119,000
5		97,000
6		87,000

The tax rate is 35 percent. The cost of capital must be computed based on the following:

		Cost (aftertax)	Weights
Debt	K_d		5.80	%	35	%
Preferred stock	K_p		11.60		5
Common equity (retained earnings)	K_e		16.00		60

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.)

Year	Depreciation Base	Percentage Depreciation	Annual Depreciation
1	$		$
2
3
4
5
6

			$

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.)

Year	Cash Flow
1	$
2
3
4
5
6

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

Weighted average cost of capital

%

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.)

Net present value

$

d-2.	Should DataPoint purchase the new equipment?

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depreciation

September 7, 2019/in Questions Uploads /by Hannah Wangui

Question

Hercules Exercise Equipment Co. purchased a computerized measuring device two years ago for $50,000. The

equipment falls into the five-year category for MACRS depreciation and can currently be sold for $20,800.

A new piece of equipment will cost $140,000. It also falls into the five-year category for MACRS depreciation.

Assume the new equipment would provide the following stream of added cost savings for the next six years. Use Table 12–12. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

Year	Cash Savings
1	$58,000
2	50,000
3	48,000
4	46,000
5	43,000
6	32,000

The firm’s tax rate is 30 percent and the cost of capital is 8 percent.

a.	What is the book value of the old equipment? (Do not round intermediate calculations and round your answer to the nearest whole dollar.)

Book value

$

b.	What is the tax loss on the sale of the old equipment? (Do not round intermediate calculations and round your answer to the nearest whole dollar.)

Tax loss

$

c.	What is the tax benefit from the sale? (Do not round intermediate calculations and round your answer to the nearest whole dollar.)

Tax benefit

$

d.	What is the cash inflow from the sale of the old equipment? (Do not round intermediate calculations and round your answer to the nearest whole dollar.)

Cash inflow

$

e.	What is the net cost of the new equipment? (Include the inflow from the sale of the old equipment.) (Do not round intermediate calculations and round your answer to the nearest whole dollar.)

Net cost

$

f.	Determine the depreciation schedule for the new equipment. (Round the depreciation base and annual depreciation answers to the nearest whole dollar. Round the percentage depreciation factors to 3 decimal places.)

Year	Depreciation Base	Percentage Depreciation	Annual Depreciation
1	$		$
2
3
4
5
6

			$

g.	Determine the depreciation schedule for the remaining years of the old equipment. (Round the depreciation base and annual depreciation answers to the nearest whole dollar. Round the percentage depreciation factors to 3 decimal places.)

Year	Depreciation Base	Percentage Depreciation	Annual Depreciation
1	$		$
2
3
4

h.	Determine the incremental depreciation between the old and new equipment and the related tax shield benefits. (Enter the tax rate as a decimal rounded to 2 decimal places. Round all other answers to the nearest whole dollar.)

Year	Depreciation on New Equipment	Depreciation on Old Equipment	Incremental Depreciation	Tax Rate	Tax Shield Benefits
1	$	$	$		$
2
3
4
5
6

i.	Compute the aftertax benefits of the cost savings. (Enter the aftertax factor as a decimal rounded to 2 decimal places. Round all other answers to the nearest whole dollar.)

Year	Savings	(1 – Tax Rate)	Aftertax Savings
1	$58,000		$
2	50,000
3	48,000
4	46,000
5	43,000
6	32,000

j-1.	Add the depreciation tax shield benefits and the aftertax cost savings to determine the total annual benefits. (Do not round intermediate calculations and round your answers to the nearest whole dollar.)

Year	Tax Shield Benefits from Depreciation	Aftertax Cost Savings	Total Annual Benefits
1		$	$
2
3
4
5
6

j-2.	Compute the present value of the total annual benefits. (Do not round intermediate calculations and round your answer to the nearest whole dollar.)

Total annual benefits

$

k-1.	Compare the present value of the incremental benefits (j) to the net cost of the new equipment (e). (Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round your answer to the nearest whole dollar.)

Net present value

$

k-2.	Should the replacement be undertaken?

	YesNo

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Comparison of private and public debt

September 7, 2019/in Questions Uploads /by Hannah Wangui

Question

Problem 15-17 Comparison of private and public debt offering [LO1]The Landers Corporation needs to raise $1.20 million of debt on a 20-year issue. If it places the bonds privately, the interest rate will be 12 percent. Twenty thousand dollars in out-of-pocket costs will be incurred. For a public issue, the interest rate will be 10 percent, and the underwriting spread will be 2 percent. There will be $120,000 in out-of-pocket costs. Assume interest on the debt is paid semiannually, and the debt will be outstanding for the full 20-year period, at which time it will be repaid. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. a.For each plan, compare the net amount of funds initially available—inflow—to the present value of future payments of interest and principal to determine net present value. Assume the stated discount rate is 14 percent annually. Use 7.00 percent semiannually throughout the analysis. (Disregard taxes.)(Assume the $1.20 million needed includes the underwriting costs. Input your present value of future payments answers as negative values. Do not round intermediate calculations and round your answers to 2 decimal places.) Private Placement Public Issue Net amount to Landers$ $ Present value of future payments Net present value$ $ b.Which plan offers the higher net present value? Public issuePrivate placement

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Determining size of lease payment

September 7, 2019/in Questions Uploads /by Hannah Wangui

Question

Problem 16-22 Determining size of lease payment [LO4]The Hardaway Corporation plans to lease a $720,000 asset to the O’Neil Corporation. The lease will be for 15 years. Use Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. a.If the Hardaway Corporation desires a return of 14 percent on its investment, how much should the lease payments be? (Do not round intermediate calculations and round your answer to 2 decimal places.)
Lease payment$ b.If the Hardaway Corporation is able to take a 10 percent deduction from the purchase price of $720,000 and will pass the benefits along to the O’Neil Corporation in the form of lower lease payments (related to the Hardaway Corporation in the form of lower initial net cost), how much should the revised lease payments be? The Hardaway Corporation desires a return of 14 percent on the 15-year lease. (Do not round intermediate calculations and round your answer to 2 decimal places.) Revised lease payment$