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Concept of cost of capital 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: a. An analyst evaluating the North facility expects that the project will be financed by debt that costs the firm 7.0% What recommendation do you think this analyst will make regarding the investment opportunity? b. Another analyst assigned to study the South facility believes that funding for that project will come from the firm's retained earnings at a cost of 16.0%. What recommendation do you expect this analyst to make regarding the investment? c. Explain why the decisions in parts a and b may not be in the best interest of the firm's investors 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? * Data Table f. Compare and contrast the analysts' initial recommendations with your findings in parte. Which decision method seems more appropriate? Explain why. a. An analyst evaluating the North facility expects that the project will be financed by debt that costs the firm 7.0% What recommendation do you think this analyst will (Click on the icon here in order to copy the contents of the data table below O A. The analyst will probably recommend not investing in the North project because the project's expected return of 8.0% is greater than the expected financing cost into a spreadsheet.) OB. The analyst will probably recommend investing in the North project because the project's expected return of 7.0% is greater than the expected financing cost of Basic variables North South Cost OC. The analyst will probably recommend investing in the North project because the project's expected return of 8.0% is greater than the expected financing cost of $6,000,000 $5,000,000 Life 15 years 15 years OD. The analyst will probably recommend investing in the North project because the project's expected return of 7.0% is greater than the expected financing cost of Expected return 8.0% 15.0% Least-cost financing Source Debt Equity Cost (after-tax) 7.0% 16.0% Decision Action Invest Don't invest Reason 8.0% > 7.0% cost 15.0%

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