400-600 words plus 1 excel spreadsheet
The director of finance has discovered an error in his WACC calculation. He did not factor in the tax rate when determining the cost of debt. UPC has a line of credit at 4% interest and the company is taxed at 30%. Further assume that UPCs required rate of return on equity is 14% and its capital structure is 40% debt and 60% equity. Additionally the budget committee question and answer session revealed that UPC has discovered a technology that will increase its product life span by 1 year. The new technology will add $120000 and $130000 to projects A and Bs initial capital outlay respectively. Further the finance department has determined that cash flows for years 1 2 and 3 will be unchanged. However net cash flows for year 4 will be $300000 and $150000 for projects A and B respectively.
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