Concept of cost of capital Mace Manufacturing is in the process of analyzing its investment decision making procedures. Two projects evaluated by the firm recently involved building new facilities in differnt regions, North and South. The basic variables surrounding each project analysis and the resulting decision arctions are summarized in the following table

a. an analyst evaluating the North facility expects the project will be financed by debt that costs the firm 7%. What recommendations do you think thes analyst will make regarding the investment opportunity?

b. Another analyst assged to study the South facility believes that the funding for that project will come from the firm's retained earnings at a cost of 16%. What recommendations do you think thes analyst will make regarding the investment opportunity?

c. Explain why the decisions in part a and b may not be in the best interest of the firm's investors.

d. If the firm maintains a capital structure containing 40% debt and 60% equity, find it weighted average cost using data in the table.

e. If both analysts had used the weighted average cost calculated in part d, what recommendations would they ahve made regarding the North and South facilities?

f. Compare and contrast the analyst's initial recommendation with your finding in part e. Which decision method seems more appropriate? Why?

Basic Variables	North	South
Cost	$ 6,000,000	$ 5,000,000
Life	15	15
Expected Returns	0.08	0.15
Least Cost Financing
Source	Debt	Equity
Cost (after-tax)	0.07	0.16
Decision
Action	Invest	Don't Invest
Reason	.08>.07	.15<.16