Wren Manufacturing is in the process of analyzing its investment decision-making procedures. The two projects evaluated by the firm during the past month were projects 263 and 264. The basic variables surrounding each project analysis and the resulting decision actions are summarized in the following table.

a. Evaluate the firm€™s decision-making procedures, and explain why the acceptance of project 263 and rejection of project 264 may not be in the owners€™ best interest.
b. If the firm maintains a capital structure containing 40% debt and 60% equity, find its weighted average cost using the data in the table.
c. If the firm had used the weighted average cost calculated in part b, what actions would have been indicated relative to projects 263 and 264?
d. Compare and contrast the firm€™s actions with your findings in part c. Which decision method seems more appropriate? Explainwhy.

Transcribed Image Text:

Basic variables Project 263 $64,000 15 years Project 26-4 S58,000 15 ycars 15% Life Expected return Least-cost financing Debt Equity 16% Cost (after-tax) Decision Action Invest Don't invest 15% < 16% cost Reason > 7% cost