Question

Speedy Delivery Systems can tuy a piece of equipment that is anticipaled to provide an 8 perocent relum and can be financed at 5 percent with debl Later in the year, the firm tums down an oppartunity to tuy a new machine that would yield a 12 percent return but would cast 14 percent to finance through commn eguily Assume debt and common equity each represent 50 percent of the frm's captal struchures a. Compute the woighted avcrage cost of captal. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) Weighted average cost of capital b. Which prolect/s) should be accepted? Now machine Picce of oquipmant

Answer 1

Solution As given, Agsume dubt ard Commen -eui eachrcrnet So' he im Capital Stmetae te 50% ORO 50 S0. OR 0,50 Debt (Kd) cest dabt cest Neightid Avag Compntahon Calpital fACC) Weight Cost dobt egdizy WACC 0.50 x 5 O.S X4 WACC 7 t2.5=9.5 9.5 WACC Accept thi Prujet, (b) h Retum 7 W ACC berauae avenage y a neu mauhine t Retumv St is arume thoct both the frrjeut both are evauatad ad WACC, When it Compared to hACC 9.5 Whithi hiyh pret. 30Spesdy Detiverrydim ved machire tham WACC So Aecept the houtd