Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
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Beacon Company is considering automating its production facility. The initial investment in automation would be $10.31
million, and the equipment has a useful life of 8 years with a residual value of $1,030,000. The company will use straight-
line depreciation. Beacon could expect a production increase of 43,000 units per year and a reduction of 20 percent in
the labor cost per unit.
Current (no
automation)
82,000 units
Proposed
(automation)
125,000 units
Production and sales volume
Per
Unit
Per
Total
Unit
Total
Sales revenue
Variable costs.
Direct materials
Direct labor
Variable manufacturing
overhead
$ 96
$ ?
$ 96
$ ?
$ 16
$ 16
15
?
9
9
Total variable manufacturing
costs
Contribution margin
$ 56
49
40
?
?
$ 59
?
Fixed manufacturing costs
$ 1,240,000
$ 2,330,000
Net operating income
?
?
3. Determine the project's payback period. (Round your answer to 2 decimal places.)
Payback period
years](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F96933eaf-2907-4d7e-bfa9-fc63cfc37fc9%2F9d8c4f1f-cf4a-463f-8b6d-bbcb697def4f%2Fa6ae0pj_processed.jpeg&w=3840&q=75)
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