Creek Manufacturing is in the process of analyzing its investment decision-making procedures. Two projects, namely Nord and Lucas, evaluated by the firm recently involved building new facilities in different regions of Germany. The basic variables surrounding each project analysis and the resulting decision actions are summarized in the following table.

a. An analyst evaluating Project Nord expects that the project will be financed by debt that costs the firm 8%. What recommendation do you think this analyst will make regarding the investment opportunity?

b. Another analyst assigned to study Project Lucas believes that funding for that project will come from the firm’s retained earnings at a cost of 17%. What recommendation do you expect this analyst to make regarding the investment?

c. Explain why the decisions in parts a and b may not be in the best interests of the firm’s investors.

d. If the firm maintains a capital structure containing 60% debt and 40% equity, find its weighted average cost of capital (WACC) using the data in the table.

e. If both analysts had used the WACC calculated in part d, what recommendations would they have made regarding Project Nord and Project Lucas?

f. Compare and contrast the analyst’s initial recommendations with your findings in part e. Which decision method seems more appropriate? Explain why.

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Basic variables Initial cost Project life Expected return Least-cost financing Source Cost (after-tax) Decision Action Reason Project Nord 12,000,000 12 years 10% Debt 8% Invest 10% > 8% cost Project Lucas 10,000,000 14 years 15% Equity 17% Reject 15% 17% cost