Economic decision

The Engineering Products Division of 4M Corporation has two mutually exclusive alternatives A and B with ROR values of ij. = 9.2% and i~ = 5.9%. The financing scenario is yet unsettled, but it will be one of the following: plan I-use all equity funds, which are currently earning 8% for the corporation; plan 2-use funds from the corporate capital pool which is 25% debt capital costing 14.5% and the remainder from the same equity funds mentioned above. The cost of debt capital is currently high because the company has narrowly missed its projected revenue on common stock for the last two quarters, and banks have increased the borrowing rate for 4M.

Make the economic decision on alternative A versus B under each financing scenario.

 

Solution: