Adjusting WACC when the project is financed with different debt ratios

In Part 2, we assume that Sangria's crusher project is financed in the same debtequity ratio as the company as a whole (40% debt ratio). What if that is not true? For example, what if Sangria's perpetual crusher project supports only 20% debt, versus 40% for Sangria overall?

Moving from 40% to 20% debt may change all the inputs to the WACC formula. Obviously the financing weights change. But the cost of equity R_E is less, because financial risk is reduced. The cost of debt may be lower too, but here we assume it stays at 6% when the debt ratio is 20%.

Recall from part 2 that Sangrias cost of equity at 40% debt ratio is 12.4%.

Question 4: What is the appropriate discount rate for Sangria's crusher project if it supports only 20% debt ratio?

The WACC is 9%

PART 1 of the question asks:

Using Sangria's WACC to Value a Project

Sangria's enologists have proposed investing $12.5 million in the construction of a perpetual crushing machine, which (conveniently for us) never depreciates and generates a perpetual stream of earnings and cash flow of $1.731 million per year pre-tax.

The project is average risk of the overall company. Sangria will maintain the same capital structure for this project. Sangria pays taxes at the marginal rate of 35%.

Question 2: Should Sangria take this project?