c) d) Cost of equity using the DCF approach Weighted average cost of capital (WACC) Problem 4 (30 points) s & P Corporation (SPC) is considering entering a new line of business. In analyzing the potential business, the financial staff has accumulated the following information: The new business will require a capital expenditure of $5.5 million at t-0. This expenditure will be used to purchase new equipment This equipment will be depreciated according to the following depreciation schedule: . MACRS Depreciation Rates 0.20 0.32 0.19 0.12 0.11 0.06 Year 5 The equipment will have no salvage value after four years. . If SPC goes ahead with the new business, inventories will rise by $400,000 at t 0, and its accounts payable will rise by $100,000 at t- O. This increase in net operating working capital will be recovered at t 4 The new business is expected to have an economic life of four years. The business is expected to generate sales of $4 million at t = 1, $3 million at t = 2, and $5 million peryear for the remainder of the economic life. Each year, operating costs excluding depreciation are expected to be 50% of sales The cormpany's tax rate is 40%. The company's interest expense each year will be $100,000. The company is very profitable, so any accounting losses on this project can be used to reduce the company's overall tax burden. . The company's overall WACC is 7.62%. However, the proposed project is riskier than the average project for SPC and you are asked to add 2% to the WACC when calculating NVP. and payback period, and write a short memo to Dr. Sanchez-SPC Chief Financial Officer- lculate NPV, IRR ommending or not entering new business line. Explain your recommendation. hlom E (10 nointsl Tesar Chemicals is considering Projects S and L, whose Net Present Value and Internal Rat