| Solution |
| Calculating Weighted Average Cost of Capital |
| | Shares | Value | Total Value | Weight |
| Common Stock | 180000 | 50 | $ 9,000,000.00 | 51.96% |
| Debt | 7000 | 108 | $ 756,000.00 | 4.36% |
| Preferred Stock | 8000 | 95 | $ 760,000.00 | 4.39% |
| Total | | | $ 17,320,000.00 |
| Calculating Cost |
| Cost of Debt |
| 6.76% |
| Cost of Preferred Stock, under the assumption that there is a PAR value of $100 is calculated by |
| Preferred dividend/ price of preferred stock |
| = 5.50/95 |
| 5.79% |
| Cost of equity |
| =5%+.90*12% |
| 15.800% |
| WACC |
| | Weight | Cost of Capital | Tax shield | Weighted Average Cost |
| Common Stock | 51.96% | 15.80% | 0 | 8.21% |
| Debt | 4.36% | 6.76% | 35% | 0.19% |
| Preferred Stock | 4.39% | 5.79% | 0 | 0.25% |
| WACC | | | | 8.66% |
| Case I |
| Paying a pollution tax (Carbon Offsets) onetime of $13,000,000 immediately which has a NPV of -$13,000,000 |
| Case II |
| Closing the plant and installing a power cable from the mainland to the Island. |
| Year | Cash Flow | Discounted Value |
| 0 | 0 |
| 1 | $ (1,000,000.00) | -920335.57024755 |
| 2 | $ (3,000,000.00) | -2541052.68558865 |
| 3 to ∞ | $ (750,000.00) | -6754320.14325763 |
| | Net Present value | -10215708.3990938 |
| Case III |
| Retrofitting the plant with scrubbers to reduce emissions and make the plant green |
| | | | | | Interest |
| Year | Cash Flow | Discounted Cash Flow | | | 8.66% |
| 0 | $ - 0 | $ - 0 |
| 1 | $ (7,500,000.00) | $ (6,902,516.78) |
| 2 | $ (100,000.00) | $ (84,701.76) |
| 3 | $ (100,000.00) | $ (77,954.04) |
| 4 | $ (100,000.00) | $ (71,743.88) |
| 5 | $ (100,000.00) | $ (66,028.44) |
| 6 | $ (100,000.00) | $ (60,768.32) |
| 7 | $ (100,000.00) | $ (55,927.25) |
| 8 | $ (100,000.00) | $ (51,471.84) |
| 9 | $ (100,000.00) | $ (47,371.36) |
| 10 | $ (100,000.00) | $ (43,597.55) |
| 11 | $ (100,000.00) | $ (40,124.38) |
| 12 | $ (100,000.00) | $ (36,927.89) |
| 13 | $ (100,000.00) | $ (33,986.05) |
| 14 | $ (100,000.00) | $ (31,278.57) |
| 15 | $ (100,000.00) | $ (28,786.78) |
| 16 | $ (100,000.00) | $ (26,493.50) |
| 17 | $ (100,000.00) | $ (24,382.91) |
| 18 | $ (100,000.00) | $ (22,440.46) |
| 19 | $ (100,000.00) | $ (20,652.75) |
| 20 | $ (100,000.00) | $ (19,007.46) |
| 21 | $ (100,000.00) | $ (17,493.24) |
| 22 | $ (100,000.00) | $ (16,099.65) |
| 23 | $ (100,000.00) | $ (14,817.09) |
| 24 | $ (100,000.00) | $ (13,636.69) |
| 25 | $ (100,000.00) | $ (12,550.33) |
| 26 | $ (100,000.00) | $ (11,550.52) |
| 27 | $ (100,000.00) | $ (10,630.35) |
| 28 | $ (100,000.00) | $ (9,783.49) |
| 29 | $ (100,000.00) | $ (9,004.09) |
| 30 | $ (100,000.00) | $ (8,286.79) |
| 31 | $ (100,000.00) | $ (7,626.63) |
| 32 | $ (100,000.00) | $ (7,019.05) |
| 33 | $ (100,000.00) | $ (6,459.89) |
| 34 | $ (100,000.00) | $ (5,945.26) |
| 35 | $ (100,000.00) | $ (5,471.64) |
| 36 | $ (100,000.00) | $ (5,035.74) |
| 37 | $ (100,000.00) | $ (4,634.57) |
| 38 | $ (100,000.00) | $ (4,265.36) |
| 39 | $ (100,000.00) | $ (3,925.56) |
| 40 | $ (100,000.00) | $ (3,612.84) |
| 41 | $ (100,000.00) | $ (3,325.02) |
| 42 | $ (100,000.00) | $ (3,060.14) |
| 43 | $ (100,000.00) | $ (2,816.35) |
| 44 | $ (100,000.00) | $ (2,591.99) |
| 45 | $ (100,000.00) | $ (2,385.50) |
| 46 | $ (100,000.00) | $ (2,195.46) |
| 47 | $ (100,000.00) | $ (2,020.56) |
| 48 | $ (100,000.00) | $ (1,859.59) |
| 49 | $ (100,000.00) | $ (1,711.45) |
| 50 | $ (100,000.00) | $ (1,575.11) |
| 51 | $ (100,000.00) | $ (1,449.63) |
| | Net Present Value | $ (7,949,001.54) |
| As per the above three alternatives, NPV is |
| Case I | $ (13,000,000.00) |
| Case II | $ (10,215,708.40) |
| Case III | $ (7,949,001.54) |
| The best alternative is Case III, where negative NPV is lowest |
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gilligansisland.xlsx
