Over-the-Top Canopies (OTC) is evaluating two independent investments. Project S costs $155,000 and has an IRR equal to 9 percent, and Project L costs $145,000 and has an IRR equal to 8 percent. OTC's capital structure consists of 20 percent debt and 80 percent common equity, and its component costs of capital are rdT = 4%, rs = 10%, and re = 13.5%. If OTC expects to generate $230,000 in retained earnings this year, which project(s) should be purchased?
Round your answers to one decimal place.
Project S -> WACC ______ % -> Acceptable? Yes / No
Project L -> WACC ______ % -> Acceptable? Yes / No
Thus, (ONLY PROJECT S, ONLY PROJECT L, BOTH PROJECTS, NEITHER PROJECT) should be purchased.
Transcribed Image Text:Over-the-Top Canopies (OTC) is evaluating two independent investments. Project S costs $155,000 and has an IRR equal to 9 percent, and Project L costs $145,000 and has an IRR equal to 8 percent. OTC's capital structure consists of 20 percent debt and 80 percent common equity, and its component costs of capital are r<sub>DT</sub> = 4%, r<sub>S</sub> = 10%, and r<sub>E</sub> = 13.5%. If OTC expects to generate $230,000 in retained earnings this year, which project(s) should be purchased? Round your answers to one decimal place.
| Project | WACC | Acceptable? |
|---------|------|--------------|
| S | | -Select- |
| L | | -Select- |
Options for selection include:
- only Project S
- only Project L
- both projects
- neither project
Thus, [Answer] should be purchased.
Definition Definition Discount rate of a project wherein its net present value equals zero. Internal rate of return equates the present value of future cash flows with the initial investments. Internal rate of return helps to determine nominal cash flows.
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Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
![Over-the-Top Canopies (OTC) is evaluating two independent investments. Project S costs $155,000 and has an IRR equal to 9 percent, and Project L costs $145,000 and has an IRR equal to 8 percent. OTC's capital structure consists of 20 percent debt and 80 percent common equity, and its component costs of capital are r<sub>DT</sub> = 4%, r<sub>S</sub> = 10%, and r<sub>E</sub> = 13.5%. If OTC expects to generate $230,000 in retained earnings this year, which project(s) should be purchased? Round your answers to one decimal place.
| Project | WACC | Acceptable? |
|---------|------|--------------|
| S | | -Select- |
| L | | -Select- |
Options for selection include:
- only Project S
- only Project L
- both projects
- neither project
Thus, [Answer] should be purchased.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fb23e2c4f-efaa-417a-9351-1cf888c16925%2Fb493e7cf-5e78-43ff-8e48-be09f95d7829%2F5vjxxar_processed.png&w=3840&q=75)
