Ellesmere Glass Works Inc. (EGWI) is considering the following two machines for manufacturing mirrors: SS Model DD Model

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Ellesmere Glass Works Inc. (EGWI) is considering the following
two machines for
manufacturing mirrors:
SS Model DD Model
Expected annual before tax cost savings $40,000 $35,000
Economic Life 10years 5 years
Price of Machine $100,000 $40,000
Both machines will be worthless at the end of their economic
life.
The machines have a CCA rate of 30%. EGWI is subject to a corporate
tax rate of 40%. EGWI
has obtained the following information for its analysis of various
investments and financial
proposals:
Expected Covariance with
Asset Return Variance Market Returns
Risk free asset 0.03
Market Portfolio 0.08 0.02
EGWI Common Stock 0.028

EGWI, an all equity firm, has a market value of $2,000,000

a. What is EGWI’s cost of capital?
b. Which of the two machines should EGWI purchase?
c. EGWI is considering the sale of $1,000,000 of 5% perpetual bonds
and uses the proceeds to
repurchase EGWI stock. If this plan is adopted:
1. What is the value of the firm with the new project
included?
2. What is the value of the firm’s equity with the new project
included?