Page 199 - DMGT521_PROJECT_MANAGEMENT

Project Management

Notes Before we proceed with plotting the MCC schedule, we need to first determine the cost of each
type of capital used. We are given the different costs of debt, so we need to solve only for the cost
of retained earnings and the cost of new common stock.
1. Cost of retained earnings


D 1 (1 0.08)
r  1  g   0.08  0.1475  14.75%
re
P 16
0
2. Cost of new common stock when the price is $16


D 1 (1 0.08)
r  1  g   0.08  0.1567  15.67%
s
P (1 F ) 16(1 0.12)


0
3. Cost of new common stock when the price is $14

D 1 (1 0.08)

r  1  g   0.08  0.1677  16.77%
s

P (1 F ) 14(1 0.12)

0
Now we can determine the WACC for each of the interval, and the table below shows the
results:
Table 11.5: Result showing for WACC
Interval WACC Break Point
1 9.86%
2 10.22% $3,000,000
3 10.58% 4,725,000
4 11.02% 5,225,000
5 11.39% 6,000,000

We can easily plot STN's MCC schedule with the information we got. Now we need to plot the
IOS. It is important to remember to rank the projects according to their IRR. In this situation, the
ranking is projects A, C, D and B.
Figure 11.4: Graphic Presentation of STN’s, MCC Schedule

IRR, WACC (%)
A
13.0
C
12.0
D
11.39
11.2
11.02
B
10.7
10.58
10.22
9.86
New
Capital
3,200,000 4,950,000 5,400,000 6,700,000
3,000,000 4,725,000 5,225,000 6,000,000

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