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 7 years. Which firm or firms, if either, should become involved in the new projects?

Question

Quizplus · Accepted Answer

Both companies should invest in the project because the annual returns of $2.2 million per year for 7 years exceed the initial investment of $8.4 million, resulting in a positive net present value. Additionally, the cost of capital for both companies is below the project's internal rate of return, which is approximately 18.6 percent. Therefore, both companies have the potential to earn a return greater than their cost of capital by participating in the new medical devices project.

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