fore taxes) of $75,000. For tax purposes, the annual depreciation deduction will be $74,000, $99,400, $32,400, and $16,200, 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 a

NOT GRADED

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 $222,000, be useful for four years, and have a $19,000 salvage value. Tate expects annual savings in cash operating expenses (before taxes) of $75,000. For tax purposes, the annual depreciation deduction will be $74,000, $99,400, $32,400, and $16,200, 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%.

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.

Under the net present value analysis, should Tate accept the proposal?

Select the most appropriate answer below.