Solution-Weighted average cost of capital

Weighted average cost of capital

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Reference no: EM133114108

Below are data gathered from SAKURA Bhd.:

	Capital Structure (RM)	Financing Cost After Tax (%)
Debentures	500,000	6
Preferred Stock	200,000	10
Common Stock	1,300,000	10

The company are evaluating two independent proposal with initial outlays of RM50,000 and RM120,000 for ProposalX and Proposal Y respectively. The desired paybackperiod is 3 years for Proposal X and 4.5 years for Proposal Y. The following information is available for both proposals:

Year	Proposal X (RM)	Proposal Y (RM)
1	10,000	30,000
2	15,000	30,000
3	20,000	30,000
4	25,000	30,000
5	30,000	40,000

Hint: The weighted average cost of capital is to be set as the minimumdiscounted rate for the present value.

1. Determine whether the company shouldinvest in any of the proposal under the following techniques:

Payback Period
Net Present Value
Profitability Index
Internal Rate of Return

2. Based on all of the above techniques, advise SAKURA Bhd. on the best equipment to invest. Provide well explanation on your suggestion.

Reference no: EM133114108

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Weighted average cost of capital

Reference no: EM133114108

Reference no: EM133114108

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