Question
Glencore Co is a glasses manufacturing company. Glencore is considering purchasing a new piece of manufacturing equipment for $2,000,000. The equipment is expected to last
Glencore Co is a glasses manufacturing company. Glencore is considering purchasing a new piece of manufacturing equipment for $2,000,000. The equipment is expected to last for 10 years, and management projects that purchasing the equipment would result in an additional $300,000 in pre-tax cash flow per year. Management does not expect the equipment to have any value at the end of 10 years, and so will fully depreciate the equipment on a straight-line basis.
To obtain the funds to purchase this equipment, Glencore plans to raise capital from the following sources:
Bank Loan: | $800,000, at an interest rate of 15%. |
Bond Indenture: | $600,000, at an interest rate of 7% |
Preferred Stock (10%) Issuance: | $600,000 |
Glencores tax rate is 20%.
(1) What is the weighted average cost of capital? Please clearly show solutions and answer.
(2) Net Present Value of the proposed investment? Use the appropriate present value tables in Appendix A or a financial calculator to calculate the present value of the future cash flows. Use the weighted average cost of capital rate obtained from (1) as the discount rate. Please clearly show solutions and answer.
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