Forÿof this week’s project, Gerry has asked you to consider two mutually exclusive investments and incorporate risk considerations into the process of evaluation.For, Gerry has asked that you create your final report, incorporating your findings inÿÿinto a comprehensive document. This item will be called yourÿand should be submitted in a Microsoft Word document. Review all your responses to Gerry’s questions forÿÿand make any corrections or improvements that have been provided to you. Then incorporate the revised work into your final report. Make sure you integrate the four parts so that your report reads as one report rather than four reports pasted together. Make sure all responses are complete and accurate, supported by references and documented examples.ÿPart 4-a: Project Selection and RiskÿThe Cosmo K Manufacturing Group is considering the addition of a new smelting machine or a new paving machine. The two investments are mutually exclusive; if one is selected, the other is rejected. The annual cash flows after taxes and the effects of depreciation, which begin one year from project start, and their respective probabilities are given below:Each project has an expected life of 4 years and will cost $45,000. The riskier project will be evaluated at the company’s WACC plus 3%, and the less risky project will be evaluated at the company’s WACC. Cosmo K has the following capital structure:This capital structure is current and consistent with the company’s objectives and so will be used to raise any new funds. All new debt will be raised using long-term bonds, with no short-term debt being used for the new project. New bonds will have a coupon rate of 13%. The company’s common stock is currently selling for $65 per share, paid a dividend of $4.25 last year, and has an expected growth rate of 6% indefinitely. There will be no floatation costs on new common stock. Preferred stock can be sold for $90 per share and pays a dividend of $10, with a floatation cost of $2 per share. Currently, the market risk premium is 5% and the risk-free rate is 8%. Cosmo K’s beta coefficient is currently 1.23 and is expected to be consistent for the foreseeable future. The tax rate is expected to be 40% for the next decade.Tasks:Answer the following questions:Submission Details:
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