3) Your employer is considering an investment in new manufacturing equipment. The cost of the machinery...

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3) Your employer is considering an investment in new manufacturing equipment. The cost of the machinery is RO 180,000 and will provide annual after-tax cash flows of RO 24,500 for 15 years. The equity financing represents three times the percent of debt financing. The risk free rate is 6% and the expected market returns is 11%. The firm's systemic risk is 1.25. The pretax cost of debt is 8%. The flotation costs of debt and equity are 2.5% and 5.5%. respectively. The firm's tax rate is 40%. Assume the project is of approximately the same risk as the firm's existing operations. 3.1. What is the weighted average cost of capital? 3.2 Ignoring flotation costs, what is the NPV of the proposed project? 3.3. After considering flotation costs, what is the NPV of the proposed project? 3.4. What is your recommendation? Why? 3) Your employer is considering an investment in new manufacturing equipment. The cost of the machinery is RO 180,000 and will provide annual after-tax cash flows of RO 24,500 for 15 years. The equity financing represents three times the percent of debt financing. The risk free rate is 6% and the expected market returns is 11%. The firm's systemic risk is 1.25. The pretax cost of debt is 8%. The flotation costs of debt and equity are 2.5% and 5.5%. respectively. The firm's tax rate is 40%. Assume the project is of approximately the same risk as the firm's existing operations. 3.1. What is the weighted average cost of capital? 3.2 Ignoring flotation costs, what is the NPV of the proposed project? 3.3. After considering flotation costs, what is the NPV of the proposed project? 3.4. What is your recommendation? Why?

Answer rating: 100% (QA)

SOLUTION 31 Calculate the WACC Debt ratio Debt Debt Equity 3030 90 25 Cost of debt after tax 8 1 40 ... View the full answer