Lester's is a globally diverse company with multiple divisions and a cost of capital of 15.8 percent.Med,Inc.is a specialty firm in the medical equipment field with a cost of capital of 13.7 percent.With the aging of America,both firms recognize the opportunities that exist in the medical field and are considering expansion in this area.At present,there is an opportunity for multiple firms to be involved in a new medical devices project.Each project will require an initial investment of $8.4 million with annual returns of $2.2 million per year for seven years.Which firm or firms,if either,should become involved in the new projects?

Question

Quizplus · Accepted Answer

NPV = -$8.4m + $2.2m(PVIFA_{7, 13.7%}) = $1,121,389Both firms should use Med, Inc.'s cost of capital. Since the project has a positive NPV at 13.7 percent, both firms should accept the new project.

Lester's Is a Globally Diverse Company with Multiple Divisions and a Cost