Mace Manufacturing is in the process of analyzing its investment decision-making procedures. Two projects evaluated by the firm recently involved building new facilities in different regions, North and South. The basic variables surrounding each project analysis and the resulting decision actions are summarized in the following table: Basic variables North South Cost $7,000,000 $6,370,000 Life 12 years 12 years Expected return 7.8% 14.7% Least-cost financing
Mace Manufacturing is in the process of analyzing its investment decision-making procedures. Two projects evaluated by the firm recently involved building new facilities in different regions, North and South. The basic variables surrounding each project analysis and the resulting decision actions are summarized in the following table:
|
Basic variables
|
North
|
South
|
|
Cost
|
$7,000,000
|
$6,370,000
|
|
Life
|
12
years |
12
years |
|
Expected return
|
7.8%
|
14.7%
|
|
Least-cost financing
|
|
|
|
Source
|
Debt
|
Equity
|
|
Cost (after-tax)
|
5.1%
|
16.6%
|
|
Decision
|
|
|
|
Action
|
Invest
|
Don't invest
|
|
Reason
|
7.8%>5.1%
cost |
14.7%<16.6%
cost |
a. An analyst evaluating the North facility expects that the project will be financed by debt that costs the firm 5.1%. What recommendation do you think this analyst will make regarding the investment opportunity?
b. Another analyst assigned to study the South facility believes that funding for that project will come from the firm's
c. Explain why the decisions in parts a and b may not be in the best interest of the firm's investors.
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