Engineering Economy 7th Edition by Leland Blank ,Anthony Tarquin

Exercise 27

Grainger and Company has an opportunity to in­vest $500,000 in a new line of direct-drive rotary screw compressors. Financing will be equally split between common stock ($250,000) and a loan with an 8% after-tax interest rate. The estimated annual NCF after taxes is $48,000 for the next 7 years. The effective tax rate is 50%. Grainger uses the capital asset pricing model for evaluation of its common stock. Recent analysis shows that it has a volatility rating of 0.95 and is paying a pre­mium of 5% above a safe return on its common stock. Nationally, the safest investment is cur­rently paying 3% per year. Is the investment finan­cially attractive if Grainger uses as the MARR its
a) equity cost of capital and b) WACC