Question
Quebec Sierra Corp. is considering investing in one of two projects. Project A requires an initial outlay of $10 million and generates a constant income
Quebec Sierra Corp. is considering investing in one of two projects. Project A requires an initial outlay of $10 million and generates a constant income stream of $2 million dollars at the end of each of the next ten years. Quebec Sierra will finance Project A with a mix of debt and equity as follows: 30% debt and 70% equity. For Project A the cost of debt is 4.6% and the cost of equity is 8.0%. Assume that Project A has no residual or salvage value at the end of 10 years. Project B requires an initial outlay of $8 million and generates a constant income stream of $3 million dollars at the end of each of the next five years. Quebec Sierra will finance Project B with a mix of debt and equity as follows: 40% debt and 60% equity. For Project B the cost of debt is 6.5% and the cost of equity is 9.0%. Assume that Project B has no residual or salvage value at the end of 5 years. Based on this information, which project should Quebec Sierra choose?
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