Discussion:
The director of finance has discovered an error in his WACC calculation. He did not factor in the tax rate when determining the cost of debt.
UPC has a line of credit at 4% interest, and the company is taxed at 30%.
Further, assume that UPC's required rate of return on equity is 14%, and its capital structure is 40% debt and 60% equity.
Additionally, the budget committee question and answer session revealed that UPC has discovered a technology that will increase its product life span by 1 year.
The new technology will add $120,000 and $130,000 to projects A and B's initial capital outlay, respectively. Further, the finance department has determined that cash flows for years 1, 2, and 3 will be unchanged. However, net cash flows for year 4 will be $300,000 and $150,000 for projects A and B, respectively.