Mace Manufacturing is in the process of analyzing its investment decision-making procedures. Two projects evaluated by the firm recently involved building new facilities in different regions, North and South. The basic variables surrounding each project analysis and the resulting decision actions are summarized in the following table:Basic variablesNorthSouthCost$7,000,000$6,370,000Life12years12yearsExpected return7.8%14.7%Least-cost financing SourceDebtEquityCost (after-tax)5.1%16.6%Decision ActionInvestDon't investReason7.8%>5.1%cost14.7%<16.6%cost d. If the firm maintains a capital structure containing 40% debt and 60% equity, find its weighted average cost using the data in the table. e. If both analysts had used the weighted average cost calculated in part d, what recommendations would they have made regarding the North and South facilities? f. Compare and contrast the analysts' initial recommendations with your findings in part e.Which decision method seems more appropriate? Explain why.

The Weighted Average Cost of Capital is calculated with the help of following formula WACC = Ke ×…

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Essentials of Business Analytics (MindTap Course List)

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ISBN:9781305627734

Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson

Publisher:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson

Chapter5: Probability: An Introduction To Modeling Uncertainty

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Mace Manufacturing is in the process of analyzing its investment decision-making procedures. Two projects evaluated by the firm recently involved building new facilities in different regions, North and South. The basic variables surrounding each project analysis and the resulting decision actions are summarized in the following table:

Basic variables	North	South
Cost	$7,000,000	$6,370,000
Life	12 years	12 years
Expected return	7.8%	14.7%
Least-cost financing
Source	Debt	Equity
Cost (after-tax)	5.1%	16.6%
Decision
Action	Invest	Don't invest
Reason	7.8%>5.1% cost	14.7%<16.6% cost

d. If the firm maintains a capital structure containing 40% debt and 60% equity, find its weighted average cost using the data in the table.

e. If both analysts had used the weighted average cost calculated in part d, what recommendations would they have made regarding the North and South facilities?

f. Compare and contrast the analysts' initial recommendations with your findings in part e.
Which decision method seems more appropriate? Explain why.

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