Capital Structure
Debt	40%
Interest Rate	5%
Tax Rate	40%
Equity	60%
Risk Free rate	6%
RM	13%
Beta	1.10
Working Capital	10%	next year's sales
No terminal cash flows
	Capital
Project 1	Investent	1,000,000
Year	Revenues	Expenses
1	860,000	645,000
2	881,500	661,125
3	903,538	677,653
4	926,126	694,594
5	949,279	711,959
6	973,011	729,758
7	997,336	748,002
8	1,022,270	766,702
	Capital
Project 2	Investent	750,000
Year	Revenues	Expenses
1	800,000	600,000
2	820,000	615,000
3	840,500	630,375
4	861,513	646,134
5	883,050	662,288
6	905,127	678,845
7	927,755	695,816
8	950,949	713,211
	Capital
Project 3	Investent	1,000,000
Year	Revenues	Expenses
1	950,000	760,000
2	973,750	779,000
3	998,094	798,475
4	1,023,046	818,437
5	1,048,622	838,898
6	1,074,838	859,870
7	1,101,709	881,367
8	1,129,251	903,401

1)Compute the cost of debt financing

Debt = WD

40.00%

Interest Rate = cost of debt before tax

5.00%

Tax Rate

40.00%

Cost of debt after tax = cost of debt before tax x (1- tax rate)

Cost of debt after tax =5%x(1-40%)

3.00%

2)cost of equity financing using the capital asset pricing model (CAPM)

Equity WE

60.00%

Risk Free rate RF

6.00%

RM

13.00%

Beta

1.1

Cost of equity = RF+ beta x (RM-RF)

Cost of equity = 6% + 1.1 x (13% -6%)

13.70%

3)weighted average cost of capital (WACC)

WACC =WE x Cost of equity + WD x Cost of debt after tax

WACC = 60% x 13.70% + 40% x 3%

9.42%

4)

The capital investment is to be depreciated as a 7 year asset

Depreciation rate MACRS 7years

Project 1 = $1,000,000

Project 2 = $750,000

Project 3 = $1000000

1

14.29%

$142,900

$107,175

$142,900

2

24.49%

$244,900

$183,675

$244,900

3

17.49%

$174,900

$131,175

$174,900

4

12.49%

$124,900

$93,675

$124,900

5

8.93%

$89,300

$66,975

$89,300

6

8.92%

$89,200

$66,900

$89,200

7

8.93%

$89,300

$66,975

$89,300

8

From the table above calculate the following:

6.Calculate the Net present value (NPV)
7.calculate the internal rate of return (IRR)
8.what is the Payback
9.Decision is to accept or reject the project