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    Shimaa Abou Sree
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    This document summarizes the calculation of the weighted average cost of capital (WACC) for a company with a debt ratio of 40% and cost of debt of 11.2%, and cost of equity of 27%. The calculated WACC is 20.68%. It then evaluates two potential projects, project S and project N, using payback period, discounted payback period, and net present value (NPV) analyses. It recommends project N because it has a higher NPV of $57,168 compared to project S's NPV of $30,911.

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    Weighted Average Cost of Capital.

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    This document summarizes the calculation of the weighted average cost of capital (WACC) for a company with a debt ratio of 40% and cost of debt of 11.2%, and cost of equity of 27%. The calculated WACC is 20.68%. It then evaluates two potential projects, project S and project N, using payback period, discounted payback period, and net present value (NPV) analyses. It recommends project N because it has a higher NPV of $57,168 compared to project S's NPV of $30,911.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    9 views4 pages

    Finanace Project

    Uploaded by

    Shimaa Abou Sree
    This document summarizes the calculation of the weighted average cost of capital (WACC) for a company with a debt ratio of 40% and cost of debt of 11.2%, and cost of equity of 27%. The calculated WACC is 20.68%. It then evaluates two potential projects, project S and project N, using payback period, discounted payback period, and net present value (NPV) analyses. It recommends project N because it has a higher NPV of $57,168 compared to project S's NPV of $30,911.

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    © All Rights Reserved
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    of 4

    Shimaa Abo Sree Abdel Azeem

    Group 2CC

    Managerial Finance
    Mid-term Exam
    A) Calculate the Weighted Average Cost of Capital
    Debt Ratio= Total Liabilities / Total Assets
    = 2,000,000/ 5,000,000
    = 40%
    Equity Ratio = 100 %-40%= 60%

    Cost of Debt = I ( 1 - T )
    = 14% ( 1 - 20% ) = 11,2 %
    Cost of Equity (R.R.R) = RF + B (Rm – RF )
    = 15% + 1.2 ( 25% - 15% )
    = 15% + 12% = 27%
    WACC = Weighted Average Cost of Capital
    (Cost of Debt X % of Debt ) + ( Cost of Equity X % of Equity)
    = ( 11.2 % X 40% ) + ( 27% X 60% )
    = ( 4.48 + 16.2 ) = 20.68 %
    B) Using payback, discounted payback, and net present value techniques, which
    project would you recommend, if any?

    Project (S) Project (N)

     Payback Period =  Payback Period =


    ( 240000 + 230000 ) = 470 000 ( 170000 + 200000) = 370 000
    500000-470000 = 30000 / 190000 = 500000- 370000 = 130000 / 250000
    0.157 +2 years = 0.52 + 2
    = 2.157 year = 2.52 years

     Discounted Payback Period =  Discounted Payback Period =

    1 – 240000 / (1.2068 ) = 198,873 1- 170000 / (1.2068 ) = 140,868


    2 – 230000 / (1.2068 )² = 157,927 2- 200000 / (1.2068 )² = 137,328
    3- 190000 / (1.2068 )³ = 108,105 3- 250000 / (1.2068 )³ = 142,244
    4- 140000 / (1.2068 ) ⁴ = 66,006 4- 290000 / (1.2068 ) ⁴ = 136,728
    = 464,906+((500000-464,906)/66006) =420,441+((500000-420,441)/136727)
    = 0.53 +3= 3.53 year = 3.581 year

     NPV  NPV =
    -CFO + ∑ PVCF -500,000 + 557,168
    - 500,000 + 530,911 = 57,168
    = 30,911

    I recommend project (N) because the NPV is higher than Project (S).

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