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Marginal Cost of Capital (MCC) is the weighted average cost of capital for the last dollar raised in new capital. MCC of the company remains constant for some time after which it increases. This depends on the amount of additional capital raised and eventually increases as the cost of raising new capital is higher due to flotation cost. This is mostly evident in case of
Marginal cost of capital is calculated as below:
Proportion of debt in the target capital structure “
Proportion of
Proportion of common equity in the target capital structure “
After tax cost of debt, preferred stock, retained earnings and new equity is “
Breakpoint is the value of the new capital that can be raised just before an increase in the firm’s weighted average cost of capital.
The company is evaluating four independent projects, each having the cost of $214,000. IRR for project 1,2,3 and 4 are 19%,15%,18%,14%. WACC is 11% up to $520,000, 12.5% from $520,000-745,000 and increases to 15.2% when above $745,000
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- Project S has a cost of $10,000 and is expected to produce benefits (cash flows) of $3,000 per year for 5 years. Project L costs $25,000 and is expected to produce cash flows of $7,400 per year for 5 years. Calculate the two projects’ NPVs, IRRs, MIRRs, and PIs, assuming a cost of capital of 12%. Which project would be selected, assuming they are mutually exclusive, using each ranking method? Which should actually be selected?arrow_forwardThere are two projects under consideration by the Rainbow factory. Each of the projects will require an initial investment of $35,000 and is expected to generate the following cash flows: Use the information from the previous exercise to calculate the internal rate of return on both projects and make a recommendation on which one to accept. For further instructions on internal rate of return in Excel, see Appendix C.arrow_forwardFollowing is information on two alternative investment projects being considered by Tiger Company. The company requires a 4% return from its investments. Project X1 Project X2 Initial investment $ (120,000) $ (200,000) Net cash flows in: Year 1 45,000 90, 000 Year 2 55,500 80,000 Year 3 80,500 70,000 Compute the internal rate of return for each of the projects using Excel functions. Based on internal rate of return, indicate whether each project is acceptable.arrow_forward
- 11-24. Peter Piper’s Pies (P3) is evaluating four independent investments. The cost of each project is $214,000. The internal rates of return (IRRs) for the projects are its — 19%, IRR2 ' 15%, IRR3 — 18%, and IRR4 - 14%. P3’s investment banker has provided the following WACC table: Which project(s) should P purchase?arrow_forwardCompany A has provided figures for two investment projects, only one of which may be chosen. These are the calculations based on the figures: Payback Period The Accounting Rate of Return / Return on Capital Employed Net Present Value Project A 2 years 4 months 27.08% £63,705 Project B 2 years 7 months 39.47% £74.971 Analyse and provide recommendations as to what project needs to be chosen based on the calculations above.arrow_forwardGama industry has the amount of $ 600000 for investment at MARR= 15%. The manager of this company considered three different projects with rates of return as project 1 = 24% , project 2 = 18% and project 3= 30%). these projects have initial investments as $100,000 ,$ 300000, and $200000 respectively. The overall rate of return will be: Select one: a. 0.23 b. 0.26 c. 0.45 d. 0.20arrow_forward
- Lewis Services is evaluating six investment opportunities (projects). The following table reflects each project's net present value NPV and the respective initial investments required. All of these projects are independent. Project NPV Investment 2,500 2,500 || 4,000 20,000 II 7,500 30,000 IV 8,000 40,000 V 2,000 10,000 VI 2,500 5,000 Lewis has an investment constraint of P50,000. Which combination of projects would represent the optimal investment that should be recommended to Lewis Services' management? O I, II, III, IV, V, and VI O I, III, V, and VI O I, II, III, V, and VI O I, III, and VIarrow_forwardFollowing Is Information on two alternative Investments belng considered by Tiger Co. The company requires a 4% return from Its Investments. Project X1 $(100,000) Project X2 $(160,800) Initial investment Expected net cash flows in: Year 1 35,000 45,500 70,500 75,000 65, 000 55,000 Year 2 Year 3 Compute the Internal rate of return for each of the projects using Excel functlons. Based on Internal rate of return, Indicate whether each project Is acceptable. (Round your answers to 2 declmal places.) IRR Acceptable? Project X1 Project X2 Mc Graw Hill Lducation Type here to search *+ F10 F11 AI F2 F7 F8 F9 F3 F4 F5 F6 F1 & 23 4 5 7 T G H. V N M C * 0O Barrow_forwardFollowing is information on two alternative investment projects being considered by Tiger Company. The company requires a 4% return from its investments. Initial investment Net cash flows in: Year 1 Year 2 Year 3 Project X1 Project X2 IRR 21.00 % 12.00 % Project X1 $ (90,000) Yes Yes 30,000 40,500 65,500 Compute the internal rate of return for each of the projects using Excel functions. Based on internal rate of return, indicate whether each project is acceptable. Note: Round your answers to 2 decimal places. Acceptable? Project X2 $ (140,000) 67,500 57,500 47,500arrow_forward
- Lewis Services is evaluating six investment opportunities (projects). The following table reflects each project’s net present value NPV and the respective initial investments required. All of these projects are independent. Project NPV Investment I 2,500 2,500 II 4,000 20,000 III 7,500 30,000 IV 8,000 40,000 V 2,000 10,000 VI 2,500 5,000 Lewis has an investment constraint of P50,000. Which combination of projects would represent the optimal investment that should be recommended to Lewis Services’ management? Group of answer choices I, III, and VI I, II, III, IV, V, and VI I, II, III, V, and VI I, III, V, and VIarrow_forwardFollowing is information on two alternative investment projects being considered by Tiger Company. The company requires a 7% return from its investments (PV of $1. EV of $1. PVA of $1, and EVA of $1) (Use appropriate factor(s) from the tables provided.) Initial investment Net cash flows in: Year 1 Year 2 Year 3 Required A Required B Project X1 Year 11 Year 2 Year 3 a. Compute each project's net present value. b. Compute each project's profitability index. c. If the company can choose only one project, which should it choose on the basis of profitability index? Totals Initial investment Net present value Complete this question by entering your answers in the tabs below. Project X2 Year 1 Year 2 Year 3 Totais Initial investment S Project X1 $ (116,000) Compute each project's net present value. (Round your final answers to the nearest dollar) Net Cash Flows Present Value of Net Cash Flows S 43,000 53,500 78,500 Required C O 0 Present Value of 1 at 7% Project X2 $ (192,000) $ 87,000 77,000…arrow_forwardFollowing is information on two alternative investments being considered by Jolee Company. The company requires a 12% return from its investments. Project A Project B Initial investment $ (187,325 ) $ (156,960 ) Expected net cash flows in: Year 1 55,000 35,000 Year 2 49,000 48,000 Year 3 79,295 55,000 Year 4 95,400 66,000 Year 5 55,000 27,000 a. For each alternative project compute the net present value.b. For each alternative project compute the profitability index. If the company can only select one project, which should it choose?arrow_forward
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