Question

A company wants to rise $189000 in cash for a new printing process. The company secured a long-term loan of $64000, with interest rate 3.5% p.a. The remaining cash is acquired by selling shares to investors, and the investors expect a return of investment (ROI) at 7.6% per year. Assume a corporate tax rate of 32% Determine the weighted average cost of capital. Round your answer to the nearest 0.01% Answer for part 1 % The new printing process requires an initial investment of $67,000 and will generate +$4,500 per year of net cash flow for the next 19 years. The CEO of the company would like to readjust the return of investment (ROI) for their investor so the weighted average cost of capital is the same as the internal rate of return for this project. Determine the return of investment (ROI) per year. Round you answer to the nearest 0.01%. Answer for part 2 %

Answer 1

A.) Calculation of Weighted Average Cost of Capital:

Source	Amount	Weight	Cost of Capital (%)	Weight*Cost of Capital
Long Term Loan	64000	.34	3.5	1.19
Shares	125000	.66	7.6	5.016
Total	189000	1		6.206 or 6.21

Weighted Average Cost of Capital=6.21%

B.) Calculation of return on Investment:

Calculation of IRR of the project: by using trial and error method let's take a rate of 2.6%

Year	Cash Flow	Discounting @ 2.6%	Present Value
1-19	4500	14.84	66800
Initial Investment			(67000)
NPV			(200)

let's take a rate of 2.55%

Year	Cash Flow	Discounting @ 2.55%	Present Value
1-19	4500	14.91	67101
Initial Investment			(67000)
NPV			101

IRR= (0.05/301)*101=0.017+2.55=2.567%

As per the question Weighted Average Cost of Capital will be equals to IRR.

So Calculation of ROI:

Source	Amount	Weight	Cost of Capital (%)	Weight*Cost of Capital
Long Term Loan	64000	.34	3.5	1.19
Shares	125000	.66	2.09	1.377(balancing figure)
Total	189000	1		2.567

Return on Investment (ROI)=2.09%.