a) Calculate the company's weighted average cost of capital.

b) Calculate the net present value (NPV) of the proposed investment and comment on your findings.
 

Question 1 Paragon Bhd., a manufacturer of electronic equipment, plans to invest RM1 million in a new product range and has forecast the following financial information: Year 1 2 3 4 Sales volume (units) 70,000 90,000 100,000 75,000 Average selling price (RM/unit) 40 45 51 51 Average variable costs (RM/unit) Fixed costs (RM/year) 30 28 27 27 500,000 500,000 500,000 500,000 The above cost forecasts have been prepared based on current prices and no account has been taken of depreciation and inflation of 4% per year on variable costs and 3% per year on fixed costs. Working capital investment accounts for RM200,000 of the proposed RM1 million investment and machinery for RM800,000. Paragon Bhd. uses a four-year evaluation period for capital investment purposes but expects the new product range to continue to sell for several years after the end of this period. The company pays tax on profits in the year in which liabilities arise at an annual rate of 26% and depreciation on machinery on a 25% per year basis. The company's target capital structure is 40% debt and 60% common stock. The after-tax yield to maturity on its bond is 7.8%. The risk-free rate (Kr) is 5 percent, and the market risk premium (km-kr) is 7 percent. The company's current beta is 1.4.