Selection of plan.
Explanation of Solution
Plan 1: Equity financing (EF) is 100%.
Plan 2: Equity finance (EF) is 40%
Present worth (PW) for 100% equity financing can be calculated as follows:
The present worth is -$895. Since the present worth is negative, this investment plan does not meet the MARR requirement.
Weighted average cost of capital (WAC) can be calculated as follows:
Weighted average cost of capital is 8.8%.
The present worth (PW) of 60% borrowing can be calculated as follows:
The present worth is -$7,065.68. Since the present worth is negative, this investment is economically not justified. It does not meet the MARR requirement. Thus, both the plans should not be selected.
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