FIN300 – Principles of Finance for the Private Sector Colorado State University – Global Campus

Executive Summary The data compiled by North Sea Oil contains information relative to the current costs of its sources of external capital which includes long term debt of 7%, preferred stock of 19%, and common stock equity of 20%. The company’s target capital structure based on the weighted average cost of capital involves 25% of long term debt, 25% of preferred stock, and 50% of common stock and retained earnings. There are two projects that are under evaluation for possible investment opportunities. The first project referred to as Project A has a total required investment of $130,000 with cash inflows over 5 years and a pay-back period of 3.5 years. The second project referred to as Project B has a total required investment of $85,000 with cash inflows over 5 years and a pay-back period of 2.3 years. Both projects are broken down by market value equity of 75% and market value debt of 25%. The total weighted average cost of capital is 16.5% with 1.75% of long term debt, 4.75% of preferred stock, ad 10% common stock equity. The market value equity for Project A is $97,500 compared to Project B’s $63,750. The market value debt for Project A is $32,500 compared to Project B’s debt value of $21,250. 2 This study source was downloaded by from CourseH on :08:03 GMT -06:00 NORTH SEA OIL The net present value of each of the projects is listed below with a calculation preference to Project A totaling an NPV of $38,027.25 compared to Project B’s total of $18,636.35. The internal rate of return of each of the