(Uses of CAPM, Capital Assets Pricing Model)
Consider investing in machinery that costs $ 1000 and generates in one year $ 1300, $ 1,100 or $ 900 with equal probability. The company is financed with $ 40,000 of debt and $ 60,000 of capital and is subject to at CORP tax rate of 30% on your corporate profits. The costs of Debt financing is 9%. The cost of capital can be estimated with the CAPM, with a beta of 1.8, 5% risk-free rate, and performance expected from the market of 8%. There is a surcharge for additional risk of 2% project. Is the purchase of machinery with VPN justified? ?(Hint: Investigate the construction of the Weighted Average Cost of Capital rate or WACC, to discount projects).