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Speedy Delivery Systems can buy a piece of equipment that N anticipated to provide an 8 percent
Speedy Delivery Systems can buy a piece of equipment that N anticipated to provide an 8 percent .urn antl can be financed e 5 percent.. debt Later in the year, the firm turns down an opportunity to buy a new machine that would yield a 12 percent return but would castle percent. finance through common equity. Assume debt and .mmon equity each represent 50 percent of the firm's capital structure.
a. Compute the weighted average cost of capital. (Do n. round Intermediate calculations. Input your answer a percent round. to Z decimal places.)
e
average castor capital
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b. Mich project(s)should be accepted? New machine. Piece of equipment
Expert Solution
| a) Computation of Weighted Average Cost of Capital (WACC): | ||||||
| Component | Cost | Weight | Weighted Cost | |||
| Debt | 5.00% | 50.00% | 2.500% | |||
| Equity | 14.00% | 50.00% | 7.000% | |||
| WACC | 9.50% | |||||
| Project | Return | WACC | ||||
| New Machine | 12% | 9.50% | ||||
| Equipment | 8% | 9.50% | ||||
| b) Since New machine is giving return more than WACC and hence New machine should be accepted. | ||||||
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