a) A corporation is considering a capital project for the coming year. The proje
ID: 2669349 • Letter: A
Question
a) A corporation is considering a capital project for the coming year. The project has an internal rate of return of 14 percent. If the firm has the following target capital structure and costs, what should their decision be and why?
Source of Capital Proportion After-tax cost
Long-term debt .40 10%
Preferred stock .10 15%
Common stock equity .50 20%
b) Determine the IRR on the following projects:
1) Initial outlay of $35,000 with an after-tax cash flow at the end of the year of $5,836 for seven years
2) Initial outlay of $350,000 with an after-tax cash flow at the end of the year of $70,000 for seven years
3) Intial outlay of $3,500 with an after-tax cash flow at the end of the year of $1,500 for three years
Explanation / Answer
We need to compare the IRR of the project to the WACC. The WACC is: 0.4 * 10% + 0.1 * 15% + 0.5 * 20% = 15.5%. Since IRRRelated Questions
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