A firm is evaluating two financing alternatives for a new project:
Option 1:
•Debt: $4,000,000 at 5% interest
•Equity: $6,000,000
Option 2:
•Debt: $6,000,000 at 6% interest
•Equity: $4,000,000
The project is expected to generate annual cash inflows of $2,000,000 for 10 years.
Requirements:
1.Calculate the WACC for each financing option.
2.Determine the NPV of the project under both financing options using a discount rate equal to the WACC.
3.Assess the financial risk associated with each option.
4.Recommend the better financing option.