Question
Grand Vitamin Company is considering two investments, each of which costs $15,000. The cash flows are below. Compute the payback period for each. Year Project
- Grand Vitamin Company is considering two investments, each of which costs $15,000. The cash flows are below.
Compute the payback period for each.
Year | Project A | Project B |
1 | $22,000 | $7,500 |
2 | 18,000 | 7,500 |
3 | 16,000 | 8,000 |
2. Which of the two projects in Problem 2 should be chosen based on the net present value method? Assume a cost of capital of 10 percent. To earn credit, show both of your NPV answers.
3. The Tom Corp wants to know its cost of capital. Its current capital structure calls for 45% debt, 15% preferred stock and 40% common equity. Initially, common stock will be in the form of retained earnings. The costs of the sources of financing are: debt: 5.5%; preferred stock: 7.4%; retained earnings: 10%; and new common stock, 11.4%. What is the weighted cost of capital? Use 2 decimals
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