Engineering Economy 7th Edition by Leland Blank ,Anthony Tarquin

Exercise 35

Omega Engineering Inc. has an opportunity to in­vest $10,000,000 in a new engineering remote control system for offshore drilling platforms. Fi­nancing will be split between common stock sales ($5,000,000) and a loan with an 8% per year inter­est rate. Omega's share of the annual net cash flow is estimated to be $1.35 million for each of the next 5 years. Omega is about to initiate CAPM as its common stock evaluation model. Recent analy­sis shows that it has a volatility rating of 1.22 and is paying a premium of 5% on its common stock dividend. The U.S. Treasury bills are currently paying 4% per year. Is the venture financially at­tractive if the MARR equals
a) the cost of equity capital and b) the WACC