You will need question number 1 to be able to answer question number 2. I need question number 2 answered.

#1

BCs has found that its cost of equity capital is 8%, and its cost of debt capital is 12%. The firm has $250,000 of equity and $750,000 of debt. What is the weighted average cost of capital?

Step 1

Assets = Liabilities + Equity

$_1000000_________ = $_750000_________ + $_250000_________

Step 2

X_debt = $_750000 / $_1000000 = .75___

X_equity = $_250000 / $1000000 = ._25__

Step 3

K_firm = (.75___)(_12__%) + (.25__)(_8__%)

= ._9___ + .__2__

= .__11__

= _11___%

#2

The WRZ Company is considering the possibility of developing a new facility. The cost of this asset is assumed to be $260,000 and the company expects to generate cash flows of $70,000 per year for the next 5 years. If the firms discount rate is equal to the WACC you found in #1 above, what is the NPV of this project, and should the company invest? (Hint: Determine which NPV template to use below.)

= PVA = R (PVAF n, i)

= $__________ (PVAF __, __%)

= $__________ ( _______ )

= $__________

- Cost $__________

= NPV $__________ Accept or Reject?