Mace Manufacturing is in the process of analyzing its investment decision-making procedures. Two projects evaluated by the firm recently involved building new facilities in different regions, North and South. The basic variables surrounding each project analysis and the resulting decision actions are summarized in the following table: Basic variables North South Cost $7,000,000 $6,370,000 Life 12 years 12 years Expected return 7.8% 14.7% Least-cost financing Source Debt Equity Cost (after-tax) 5.1% 16.6% Decision Action Invest Don't
Mace Manufacturing is in the process of analyzing its investment decision-making procedures. Two projects evaluated by the firm recently involved building new facilities in different regions, North and South. The basic variables surrounding each project analysis and the resulting decision actions are summarized in the following table: Basic variables North South Cost $7,000,000 $6,370,000 Life 12 years 12 years Expected return 7.8% 14.7% Least-cost financing Source Debt Equity Cost (after-tax) 5.1% 16.6% Decision Action Invest Don't
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Mace Manufacturing is in the process of analyzing its investment decision-making procedures. Two projects evaluated by the firm recently involved building new facilities in different regions, North and South. The basic variables surrounding each project analysis and the resulting decision actions are summarized in the following table:
|
Basic variables
|
North
|
South
|
|
Cost
|
$7,000,000
|
$6,370,000
|
|
Life
|
12
years |
12
years |
|
Expected return
|
7.8%
|
14.7%
|
|
Least-cost financing
|
|
|
|
Source
|
Debt
|
Equity
|
|
Cost (after-tax)
|
5.1%
|
16.6%
|
|
Decision
|
|
|
|
Action
|
Invest
|
Don't invest
|
|
Reason
|
7.8%>5.1%
cost |
14.7%<16.6%
cost |
d. If the firm maintains a capital structure containing 40% debt and 60% equity, find its weighted average cost using the data in the table.
e. If both analysts had used the weighted average cost calculated in part d, what recommendations would they have made regarding the North and South facilities?
f. Compare and contrast the analysts' initial recommendations with your findings in part e.
Which decision method seems more appropriate? Explain why.
Which decision method seems more appropriate? Explain why.
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