Question

You have a project that will involve the purchase of real estate and renovation of the real estate.
Your our analysis indicates the project should have an IRR of 10 percent. Financing will consist of a mortgage (debt) of $90,000 dollars which represents 80 percent of the financing. The pretax cost of debt is estimated to be 8.5 percent. The remaining proportion of the financing will come from selling shares of your stock portfolio. Historically, your return has been 11 percent. Your marginal tax rate is 21 percent.
How would excel be used to figure this out?
Should you pursue the project?

Answer 1

Answer:

Yes the company should you pursue the project.

Explanation:

This problem requires us to tell whether we should pursue the project or not. The IRR of the project is given in the question and WAAC is required to be calculated. The company should accept the project if IRR (10%) is greater than or equal to company's WAAC.

So let calculate waac first.

WAAC = 80%* 8.5% (100% -21%) + 20% * 11%

          = 5.4% + 2.2 %

          = 7.6%

based on above mentioned rule the company should pursue the project.