BELOW IS MY INSTRUCTIONS AND MY WORK I DID. I NEED HELP WITH THE INFORMATION AND QUESTION BELOW THIS IN BOLD. IT GOES WITH THE INFORMATION UNDER IT.

In my opinion, the WACC (weighted average cost of capital) is a useful tool, but the assumptions it relies on have flaws. I feel that certain of the WACC's components, such as profitability and opportunity cost, are undeterminable. "

Ok lets run with this!

ABC is looking at two projects: Project A and Project B. Project A is a 7 year life equipment purchase. Project A has a capital request of $1,000,000. Project B is a 9 year project. It has a $1,000,000 capital request.

Project A with a NPV of 8% is barely a positive $100,000. Project B with a NPV interest rate of the specific borrowing rate of 4% has a NPV of $250,000.

What do you think?

________________

If new equipment is to be purchased, there is little doubt that substantial sums of money will be required from the firm. All available sources of funding must be evaluated to arrive at the optimum financial option. A debt-financed investment in new equipment, as Joanna suggests, is an excellent option in my opinion. Because it is just the interest rate on new debt, and not the interest rate on the company's existing debt, which is useless (Block, Hirt, & Danielsen, 2019).

For budgeting reasons, capital projects should be assigned their own cost of capital rates. In my opinion, the WACC (weighted average cost of capital) is a useful tool, but the assumptions it relies on have flaws. I feel that certain of the WACC's components, such as profitability and opportunity cost, are undeterminable. To be profitable in a market, you have to be able to adapt to constantly shifting market conditions. However, the value of a given chance might fluctuate over time as well. Equity costs are determined by comparing the risk of a certain project to the risk of comparable projects (Brigham & Houston, 2019). When it comes to both companies and investors, it's difficult to assess opportunity costs since they alter with time.

------

Hi Alex.

I think even if the WACC of Joanna's proposal is just 9 percent, it is only below the barrier of 10%, I feel that our firm should support her idea. The return on this investment will still surpass the cost of debt since the vendor is prepared to finance the equipment and our firm is paying a lower rate of 7 percent.

As long as we're relying on outside sources for funding, we're increasing the entire risk of this enterprise. However, if the profit margin exceeds the cost of capital, I believe it is worthwhile to take the risk, and I am confident in the project's eventual success. We will be able to use cash on hand instead of borrowing in the future to help fund new initiatives.

Respectfully,