The company  is deciding on which equipment toacquire. Each is worth 20Million. The company thinking if financingthe 50% equity, 25 % via 5 year term loan at 7.5 % annual effectiveinterest and the balance via $100/ share callable preferred sharesof stock that promises to pay 4% quarterly dividends. The companyconsistently paid the 5% semi annual dividends on its commonshares. Calculate the weighted average cost of capital ofthe project. Disregard taxes in your computations. Assumefull principal payment on year 5.
After receiving proposals from suppliers, the finance managercame up with the following comparative cash flow projection:
                        EquipmentA                           EquipmentB
Year1Â Â Â Â Â Â Â Â Â Â Â Â Â Â $2,000,000Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â $4,000,000
Year2Â Â Â Â Â Â Â Â Â Â Â Â Â Â $2,000,000Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â $4,000,000
Year3Â Â Â Â Â Â Â Â Â Â Â Â Â Â $5,000,000Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â $4,000,000
Year4Â Â Â Â Â Â Â Â Â Â Â Â Â Â $5,000,000Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â $4,000,000
Year5Â Â Â Â Â Â Â Â Â Â Â Â Â Â $6,000,000Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â $4,000,000
Using the information derived above, and using the Net PresentValue (NPV), Discounted Payback Period and Profitability Index,which will you recommend of the two equipment to acquire?
