You are a financial analyst for the Energy Transmission Company $($ETC$).$ Last year, ETC invested $$225,000$ in a feasibility study for a new, highly efficient compressor for pipelines, the COMP$200.$ The results of the study suggest that the COMP$200$ will be well received in the marketplace, and thus ETC is considering expanding its production capabilities to manufacture this new product. ETC is considering three mutually exclusive approaches for doing so$.$ Options $1$ and $2$ require a smaller investment in plant and equipment with a significant workforce expansion. Option $3$ requires a larger investment in sophisticated technology, butdue to automationentails less workforce expansion. While ETC's executives are confident that the COMP$200$ will be successful, there is clearly risk involved; the risk varies based on the approach, due to the different levels of fixed and variable costs. You have estimated that Option $1$ is $15\%$ less risky than an average project, while Option $2$ is $10\%$ more risky and Option $3$ is $20\%$ more risky than an average project. Capital Structure Long$-$Term Debt: $$1000$ par, $12\%$ coupon bonds with $20$ years until maturity. $32,000$ bonds outstanding. Current market price of $$1048\mathrm{.}00.$ Your investment bankers estimate that, at your investors current required rate of return, new bonds could be sold at par with $6\%$ flotation costs.Preferred Stock: $$100$ par, $14\%$ dividend preferred stock, currently selling for $$103\mathrm{.}20.80,000$ shares outstanding. Your investment bankers estimate that ETC could issue new preferred stock at par at your investors current required rate of return with $6\%$ flotation costs.Common Stock: $580,000$ outstanding shares, with a book value of $$36$ per share and a $$48\mathrm{.}00$ current market price per share. The dividend history is shown below. Your investment bankers estimate that you could issue additional common stock shares with $$1\mathrm{.}20$ per share underpricing and with flotation costs of $$2\mathrm{.}88$ per share. Dividend History YearDividend$20225\mathrm{.}3420215\mathrm{.}1420204\mathrm{.}9620194\mathrm{.}7720184\mathrm{.}60$ Key Facts Currently, the rate of return for the stock market is $13\mathrm{.}5\%,$ and the risk$-$free rate is $5\mathrm{.}8\%.$ TMCs corporate beta is $1\mathrm{.}23.$ ETC is in the $21$ percent tax bracket. ETC uses a $4-$year decision rule for payback period. Investment If ETC does not expand, it can sell the proposed expansion site for $$1,550,000.$ Option $1$ Option $1$ requires an investment in equipment and technology of $$4,200,000$ plus $$100,000$ in installation costs. The equipment and technology are classified as MACRS $5-$year property. The useful life of the equipment, however, is $8$ years; at the conclusion of the $8-$year period, it is estimated that the salvage value will be $$600,000.$ Under Option $1,$ cash will increase by $100,000,$ inventories will increase by $$350,000,$ accounts receivable will increase by $$255,000,$ accounts payable will increase by $$130,000,$ and deferred expenses will increase by $$55,000.$ Option $2$ Option $2$ requires an investment in equipment and technology of $$4,850,000,$ plus $$150,000$ in installation costs. The equipment and technology are classified as MACRS $5-$year property. The useful life of the equipment, however, is $8$ years; at the conclusion of the $8-$year period, it is estimated that the salvage value will be $$560,000.$ Under Option $2,$ cash will increase by $105,000,$ inventories will increase by $$440,000,$ accounts receivable will increase by $$260,000,$ accounts payable will increase by $$135,000,$ and deferred expenses will increase by $$58,000.$ Option $3$ Option $3$ requires an investment in equipment and technology of $$8,200,000,$ plus $$150,000$ in installation costs. The equipment and technology are classified as MACRS $5-$year property. The useful life of the equipment, however, is $8$ years; at the conclusion of the $8-$year period, it is estimated that the salvage value will be $$1,200,000.$ Under Option $3,$ cash will increase by $160,000,$ inventories will increase by $$480,000,$ accounts receivable will increase by $$260,000,$ accounts payable will increase by $$140,000,$ and deferred expenses will increase by $$75,000.$ Projected Revenues and Expenses $($R revenues; OC operating costs$)20232024202520262027202820292030$R$1$$$2,540,000$$$2,690,000$$$2,940,000$$$2,990,000$$$2,840,000$$$2,690,000$$$2,490,000$$$2,400,000$R$2$$$2,56,0000$$$2,750,000$$$2,900,000$$$3,000,000$$$3,050,000$$$2,750,000$$$2,650,000$$$2,550,000$R$3$$$2,850,000$$$3,000,000$$$3,200,000$$$3,350,000$$$3,250,000$$$3,150,000$$$3,000,000$$$2,900,000$OC$1$$$1,200,000$$$1,235,000$$$1,290000$$$1,300,000$$$1,330,000$$$1,325,000$$$1,320,000$$$1,310,000$OC$2$$$1,245,000$$$1,255,000$$$1,130,000$$$1,095,000$$$1,020,000$$$1,000,000$$$985,000$$$970,000$OC$3$$$620,000$$$640,000$$$655,000$$$410,000$$$425,000$$$445,000$$$435,000$$$440,000$ Other Factors Requiring Attention In determining weights for the capital structure, you know that a target$-$weights capital structure is best. But when you asked the CFO what the target weights were, he said, we dont use target weights. So$,$ youll just have to do the next best thing rather than the best thing. In your finance courses at the university, you learned that the cost of equity can be estimated using Gordons Model or the CAPM. Do these two approaches come up with the same result? If not, which should you use for your analysis, and why? You have the information you need to use either non$-$risk$-$adjusted or risk$-$adjusted rates. Which should you use for your analysis, and why? You know that the required rate of return on retained earnings $($rs$)$ is less than the required rate of return on newly issued common stock $($rncs$).$ Your analysis of the financial condition of the firm, however, indicates that there is not sufficient cash being generated from retained earnings to finance either of these projects. Your Assignment With the information you have gathered, conduct a capital budgeting analysis using each of the appropriate decision rules. The companys top management will want to see your justification for your analysis, so you will need to show your work and explain your analysis and findings.