Introduction to Capital Planning

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.