MJ Industries is considering five investment opportunities. The company's cost of capital is 12%. Data on these opportunities under consideration are given below: ('000s) Project 1 2 3 4 5 Investment P35,000 20,000 25,000 10,000 9,000 PV @12% NPV P39,325 P4,325 22,930 2,930 27,453 2,453 10,854 854 8,749 (251) IRR 16% 15 14 18 11 PI 1.12 1.15 1.10 1.09 .97 (a) Based on these data, rank these five projects in descending order of preference, according to NPV, IRR, and Pl. (b) Which project/s would you select if you can invest as much as P55Million? Why? (c) Which project would you implement if the projects are mutually exclusive? Why?
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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