Mrs. McKays Nutrition Products has different methods by which a $600,000 project can be funded using debt

Question:

Mrs. McKay€™s Nutrition Products has different methods by which a $600,000 project can be funded using debt and equity capital. A net cash flow of $90,000 per year is estimated for 7 years.

Financing Plan, % Type of Financing Debt 3 Cost per Year, % 2 60 20 50 10.0 7.5 Equity 80 50 40

Determine the rate of return for each plan, and identify the ones that are economically acceptable if

(a) MARR equals the cost of equity capital,

(b) MARR equals the WACC,

(d) Do the decisions for the three financing plans support the fact that a highly leveraged project is more likely to be acceptable in that the rate of return on equity capital is higher? Explain the basis of your answer.

MARR
Minimum Acceptable Rate of Return (MARR), or hurdle rate is the minimum rate of return on a project a manager or company is willing to accept before starting a project, given its risk and the opportunity cost of forgoing other... Cost Of Equity
The cost of equity is the return a company requires to decide if an investment meets capital return requirements. Firms often use it as a capital budgeting threshold for the required rate of return. A firm's cost of equity represents the...

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