Using Tate's hurdle rate, how do I compute the net present value of this capital expenditure proposal?
Extracted text: Weighted Average Cost of Capital and Net Present Value Analysis Tate Company is considering a proposal to acquire new equipment for its manufacturing division. The equipment will cost $210,000, be useful for four years, and have a $16,000 salvage value. Tate expects annual savings in cash operating expenses (before taxes) of $72,000. For tax purposes, the annual depreciation deduction will be $70,000, $94,000, $30,600, and $15,400, respectively, for the four years (the salvage value is ignored on the tax return). The income tax rate is 40%. Tate establishes a hurdle rate for a net present value analysis at the company's weighted average cost of capital plus 1 percentage point. Tate's capital is provided in the following proportions: debt, 60%; common stock, 20%; and retained earnings, 20%. The cost rates for these capital sources are debt, 10%; common stock, 12%; and retained earnings, 13%. a. Compute Tate's (1) weighted average cost of capital and (2) hurdle rate. Round answers to one decimal place. For example, 0.4567 = 45.7%. Weighted Average Cost of Capital Debt 6 % Common stock 2.4 % Retained earnings 2.6 % (1) Weighted avg.cost of capital 11 96 (2) Tate's hurdle rate: 12 96 b. Using Tate's hurdle rate, compute the net present value of this capital expenditure proposal. Round answers to the nearest whole number. Use rounded answers for subsequent calculations. Use a negative sign with net present value to indicate a negative amount. Otherwise do not use negative signs with your answers. After-Tax Cash Flow Analysis Amount Present Value After-tax cash expense savings Tax savings from depreciation Year 1 0. 0. Year 2 0. Year 3 Year 4 0. After-tax equipment sale proceeds Total present value of future cash flows Investment required in equipment Net positive (negative) present value %24