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- Calculation of the Companies Weighted Average Cost of Capital

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The paper "Calculation of the Companies Weighted Average Cost of Capital" is a perfect example of a finance and accounting assignment. The weighted average cost of capital is the average cost of the various financing sources that exist and that are employed by a company as a part of its capital structure. These sources include the common stock, debt and preferred stock. This means that a section of each of the financing source is taken into account on the basis of the overall weight on the capital structure. In the calculation of WACC, the increase in WACC signifies an increase in the risk level.

It is worth mentioning that WACC is concerned with the history of financing rather than future financing (PPT 006). Assuming that the capital structure given will remain unchanged throughout the entire life of SREC, then WACC for scientific Robotics Equipment Corporation is determined as; WACC = W e × K e + W p × K p + W d × K d (1 - t) (PPT 006) Where W e = Weight of equity, K e is the cost of equity W p =Weight of preferred stock, K p is the cost of preferred stock W d = Weight of debt, K d is the cost of equity, and t is tax WACC = 0.25 x 5.8 % + 0.15 x 9 % + 0.6 x 12 % = 10 % (tax assumed to be zero since it is not mentioned) Question 2: Calculating the Net Present Value (NPV) Each of the Alternative Investment The Net Present Value compares the present value of all the inflows of a project with the present value of the outflows of the same project.

The decision criterion is mainly based on the outcome of the calculation with three options to choose from. That is accepting, rejecting or being indifferent. The project with the highest positive net present value is always accepted (PPT 005). NPV for Alternative One; Present Value of the Cash Inflows Present value (PV) = future value x present value interest factor Year 1: F V * PVIF 10 %, 1 = $ 260,000 x 0.9091 = $236,366 Year 2: FV * PVIF 10 %, 2 = $ 255,000 x 0.8264 = $ 210,732 Year 3: FV * PVIF 10 %, 3 = $170,000 x 0.7513 = $ 127,721 Year 4: FV * PVIF10 %, 4 = $ 130,000 x 0.6830 = $ 88,790 Year 5: FV * PVIF 10 %, 5 = $135,000 x 0.6209 = $ 83,822 Total PV of Cash Inflows $747,431 Calculating the PV of the Cash Outflows; Year 1: F V * PVIF 10 %, 1 = $ 150,000 x 0.9091 = $136,364 Year 2: FV * PVIF 10 %, 2 = $ 120,000 x 0.8264 = $ 99,174 Year 3: FV * PVIF 10 %, 3 = $ 75,000 x 0.7513 = $ 56,349 Year 4: FV * PVIF 10 %, 4 = $ 40,000 x 0.6830 = $ 27,320 Year 5: FV * PVIF 10 %, 5 = $ 40,000 x 0.6209 = $ 24,837 Total PV of Outflows $ 344,044 NPV alternative one = Present value of the cash inflows – present value of the cash outflows Thus, NPV = $ 744,326 - $ 344,044 = $ 400,282 Alternative Two; Present Value of the Cash Inflows; Present value (PV) = future value x present value interest factor (PPT 005) Year 1: F V*PVIF 10 %, 1 = $ 50,000 x 0.9091 = $ 45,455 Year 2: FV*PVIF 10 %, 2 = $ 75,000 x 0.8264 = $ 61,980 Year 3: FV*PVIF 10 %, 3 = $ 405,000 x 0.7513 = $ 304,277 Year 4: FV*PVIF 10 %, 4 = $ 490,000 x 0.6830 = $ 334,670 Year 5: FV*PVIF 10 %, 5 = $ 540,000 x 0.6209 = $ 332,182 Total PV of Cash Inflows $1,081,668 Calculating the PV of the Cash Outflows of Alternative Two Year 1: F V * PVIF 10 %, 1 = $ 75,000 x 0.9091 = $68,183 Year 2: FV * PVIF 10 %, 2 = $ 75,000 x 0.8264 = $ 61,980 Year 3: FV * PVIF 10 %, 3 = $ 95,000 x 0.7513 = $ 71,374 Year 4: FV * PVIF 10 %, 4 = $ 95,000 x 0.6830 = $ 64,885 Year 5: FV * PVIF 10 %, 5 = $ 95,000 x 0.6209 = $ 58,986 Total PV Of Outflows $325,408 NPV alternative one = Present value of the cash inflows – present value of the cash outflows (PPT 005) Thus, NPV =$ 1,078,564 - $ 325,408 = $ 753,156 Question 3 Payback period The payback period is the period a given project will take in order to recover the initial outlay of investment (PPT 007).

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