Davis Industry uses only debt and internal equity to finance its capital budget. Capital raised through...

Davis Industry uses only debt and internal equity to finance its capital budget. Capital raised through debt is $6,000,000 and common stock is selling for $100/share and there are 100,000 shares outstanding. Industry’s after tax cost of debt is 7.5%, tax rate is 20%, risk free rate is 6% and market risk premium is 8%. The beta for Davis industry is 1.4. Compute WACC of Davis Industry.

Davis industry must choose between a gas-powered and an electric-powered forklift truck for moving materials in its factory. Since both forklifts perform the same function, the firm will choose only one. They are mutually exclusive investments. The electric-powered truck will cost more, but it will be less expensive to operate; it will cost $25,000, whereas the gas-powered truck will cost $15,000. The life for both types of truck is estimated to be 4 years, during which time the net cash flows for the electric-powered truck will be $6,790 per year and those for the gas-powered truck will be $5,500 per year. Davis Industries expect to recover their investment within 3 years.

From your findings from part (a) decide which truck you will recommend using the following budgeting techniques.

Net Present Value
Profitability Index
Payback period

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