Question 4XYZ Company Ltd. is planning to invest in machinery worth $10 million in 2022. Thecompany projects the following cashflows resulting from the new investment over thenext 3 years. By the end of the 3 years, the machinery would have been fullydepreciated:2023: $4,500,0002024: $5,000,000● 2025: $4,000,000●●XYZ Co Ltd. is also planning to finance the investmentWemachinery with an issue of$ 3 million of equity to shareholders combined with debt of $ 7 million. Assuming arisk-free yield of 1% on US Treasury bills, an after-tax cost of debt of 3.5% for XYZCo., expected stock market returns of 10% and XYZ shares exhibit a beta of 1.2 timesthe returns on the broader stock market.=>Required:a) Calculate the weighted average cost of capital (WACC) for XYZ Co. Ltd.b) Using the WACC for XYZ Co., estimate the net present value (NPV) for the futurecash flows expected by the company from the investment to be made in 2022.

To determine WACC, we need to determine the weight of each source of capital using the formula…

Required: a) Calculate the weighted average cost of capital (WACC) for XYZ Co. Ltd. b) Using the WACC for XYZ Co., estimate the net present value (NPV) for the future cash flows expected by the company from the investment to be made in 2022.

Required: a) Calculate the weighted average cost of capital (WACC) for XYZ Co. Ltd. b) Using the WACC for XYZ Co., estimate the net present value (NPV) for the future cash flows expected by the company from the investment to be made in 2022.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 16P

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