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ISB had installed an automated teller machine (ATM) four years ago at its branch. The ATM cost $1,200,000 and was estimated to have a useful economic life of 10 years. The bank has been depreciating its ATM straight-line (over ten years) to an estimated book salvage value of $200,000. The current actual market value of the old ATM is $300,000. The Interactive Teller Machine will cost $2,000,000 and have an expected economic life of 6 years. The bank plans to depreciate the ITM over five years using MACRS. The bank believes ITM will attract new customers and is expected to generate $500,000 in new revenues during the first year. Revenues from these new customers are expected to grow 4% per year over the 6-year life of the new ITM. The new I TM will have an annual maintenance cost of $20,000 during the first year and will increase by 3% per year over the annual maintenance costs of the old ITM. International Sun Bank has a 25% marginal tax rate and has the following capital structure: mount (in millions) 6:08 6. 8. 28 Document (3) Capital Structure Debt Preferred Stock Common Stock (10 million shares) Paid-in-capital. Retained Earnings Equity Total $400 $350 $250 $150 $150 $550 $1,300 The bank's board of directors requires a risk-adjusted discount rate to evaluate any investments seen as expanding the bank's services. Please assume that the board considers the new ITM to fall into this category since it will handle an increased number of transactions and that the board requires an additional risk premium to be added when evaluating the project. The bank has estimated that the Beta of this investment is equal to 1.25, and the rate of return on the market portfolio and risk-free rate are 12% and 4%, respectively. What is the cost of equity based on the CAPM model? What is the weighted average cost of capital? Should the bank purchase the new ITM? Mobile View Read Aloud Headings