The CFO of Mega Munchies recently received a report that contained the following
ID: 2700928 • Letter: T
Question
The CFO of Mega Munchies recently received a report that contained the following information:
Project Cost IRR
E $200,000 19%
F $300,000 17%
G $200,000 14%
Capital Structure
Type of Capital Proportion
Debt 40%
Preferred Stock 0
Common Equity 60%
The weighted average cost of capital (WACC) is 12% if the firm does not have to issue new common equity; if new common equity is needed, the WACC is 15%. If Mega Munchies expects to generate $240,000 in retained earnings this year, which project(s) should be purchased? Why? Assume the projects are independent.
Explanation / Answer
pROJECT E should be purchased because it has less cost with higher IRR i.e., 19%...