Your company is looking at updating its production process by adding a new piece of equipment. The

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Question:

Your company is looking at updating its production process by adding a new piece of equipment. The company uses a 9% cost of capital in its capital budgeting decisions. The new equipment will cost $350,000 and the company expects the following annual cash flows for 5 years as a result of the purchase (note that year 1 is negative): Year 1 (10,000) Year 2 45,000 Year 3 127,000 Year 4 168,000 Year 5 145,000 Continuing the scenario from question 1: The CFO of your company believes that the cost of capital it has been using may be outdated and needs redefined in the current economic environment. In reviewing the company’s financials, she notes it has $1,200,000 of owner’s equity and $600,000 in debt. She determines the cost of equity to be 5% and the cost of debt to be 8%. Given this information, answer the questions below.

A) What is the company’s weighted average cost of capital (WACC)?

B) Re-calculate the NPV of the acquisition given the new cost of capital.

C) Re-calculate the IRR of the acquisition given the new cost of capital.

D) Should the company purchase the new equipment? Explain.