Capital Structure Debt Interest Rate 40% 6% Tax Rate 26% Equity Risk Free rate RM 60% 6% 13% 1.20 Beta Working Capital 10% next year's sales No terminal cash flows Capital Investent Project 1 1,000,000 Year Revenues Expenses 1 780,000 585,000 2 799,500 599,625 3 819,488 614,616 4 839,975 629,981 5 860,974 645,731 6 731,828 585,462 7 622,054 528,746 497,643 422,997 8 Project 2 Capital Investent 700,000 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 6 750,593 600,474 7 638,004 510,403 8 542,303 433,843 Capital Investent Project 3 850,000 Year NP Revenues Expenses 1 850,000 637,500 2 871,250 653,438 3 893,031 669,773 4 915,357 686,518 5 938,241 703,681 6 797,505 638,004 7 677,879 542,303 8 576,197 460,958 Instructions Compute the cost of debt financing Compute the cost of equity financing using the capital asset pricing Compute the waighted average cost of capital (WACC) The capital investment is to be depreciated as a 7 year asset please use the table on page 500 Evaluate each independent project by computing Net present value (NPV) Internal rate of return (IRR) Payback Decision is to accept or reject the project Class of investment 7-Year TATA Recovery Allowance Percentage for Personal Property 5-Year 10-Year 10.00% 18.00 14.40 -Year 33.339 44 45 14.81 20.00% 32.00 19.20 11.52 14.2996 24.49 17.49 12.49 8.93 8.92 8.93 11.52 1 9.22 7.41 11.52 5.76 7.37 6.55 Note: Residential rental property (apartments) is depreciated over a 27.5-year life, whereas com- mercial and industrial structures are depreciated over 39 years. In both cases, straight-line deprecia 28th or 40th year. A half-month convention is assumed; that is, an asset placed in service in February 2 3 4 5 6 7 8 9 10 11 ce al Kit would receive 10.5 months of depreciation in the first year. 4.46 6.55 6.56 6.55 3.28 100% 10096 100% 100% tion must be used. The depreciation allowance for the first year is based, pro rata, on the month the PA SELF-TEST What do the acronyms ACRS and MACRS stand for? Briefly describe the tax depreciation system under MACRS. Discount rate = 9.58