Royal Petroleum Co. can buy a piece of equipment that is anticipated to provide a 9 percent return and can be financed at 6 percent with debt. Later in the year, the firm turns down an opportunity to buy a new machine that would yield a 16 percent return but would cost 18 percent to finance through common equity. Assume debt and common equity each represent 50 percent of the firm's capital structure at 6 percent cost of debt and 18 percent cost of equity.
a. Compute the weighted average cost of capital.
b. Which project(s) should be accepted?