| Course | FIN-3010 Principles of Finance |
|---|---|
| Module | Module 6 |
| Paper type | Written assignment 6: cost of capital and capital budgeting |
| Length | About 688 words, 5 pages |
| Format | APA 7 student paper |
| School | Thomas Edison State University |
| Program | Bachelor of Science in Business Administration |
| Updated | October 2026 |
Free sample paper for FIN 3010 Module 6
From the Cost of Capital to a Robotic Cell Decision: WACC, Payback, NPV, IRR and the Hurdle Rate Question
Student Name
Bachelor of Science in Business Administration, Thomas Edison State University
FIN-3010: Principles of Finance
Mentor Name
Month Day, Year
From the Cost of Capital to a Robotic Cell Decision: WACC, Payback, NPV, IRR and the Hurdle Rate Question
Delair Precision Molding, the composite Camden County plastics company from the Module 5 assignment, is considering a $1.8 million robotic cell that would automate trimming and packing for its largest customer's parts. To evaluate it, the company first needs its cost of capital. The problems below estimate the cost of each source of funds, combine them into a weighted average cost of capital and apply capital budgeting methods to the project, showing all work (Mayo & Lavelle, 2024).
Problem 1: Cost of Debt
Delair's bonds have a yield to maturity of 6.4%, and its tax rate is 25%. Because interest is tax deductible, the relevant cost is after tax.
| Step | Work |
|---|---|
| Formula | kd after tax = YTM x (1 minus tax rate) |
| Calculation | 6.4% x (1 minus 0.25) |
| Answer | 4.80% |
Problem 2: Cost of Equity
With a beta of 1.3, a Treasury yield of 4.2% and an expected market premium of 5.5%, the CAPM gives Delair's equity cost.
| Step | Work |
|---|---|
| Formula | ke = risk-free rate + beta x expected market premium |
| Calculation | 4.2% + 1.3 x 5.5% = 4.2% + 7.15% |
| Answer | 11.35% |
Problem 3: Weighted Average Cost of Capital
The market value of Delair's equity is $12 million and of its debt $4 million, for total capital of $16 million.
| Source | Weight | Cost | Weighted cost |
|---|---|---|---|
| Equity | 12 / 16 = 0.75 | 11.35% | 8.51% |
| Debt | 4 / 16 = 0.25 | 4.80% | 1.20% |
| WACC | 9.71% |
Market values, not book values, are used for the weights because they reflect what investors would require today to supply the company's capital.
Problem 4: Evaluating the Robotic Cell
The cell costs $1.8 million installed and is expected to produce after-tax cash flows over six years of $420,000, $480,000, $520,000, $520,000, $480,000 and $430,000, including labor savings, a tax shield from depreciation and a modest salvage value in year 6. Because it serves Delair's existing business, its risk is similar to the firm's, so the WACC is the appropriate discount rate.
| Method | Calculation | Result |
|---|---|---|
| Payback | Cumulative cash flow turns positive in year 4: 3 + $380,000 / $520,000 | 3.73 years |
| NPV at 9.71% | Sum of each cash flow / (1.0971)^t minus $1,800,000 | $282,950 |
| IRR | Rate that sets NPV to zero, found by calculator or spreadsheet | 14.84% |
At the 9.71% cost of capital, the project's NPV is positive and its IRR exceeds the cost of capital, so it should add about $283,000 of value to the firm. Both methods agree, and the payback of under four years fits comfortably within the cell's six-year life.
Problem 5: The Hurdle Rate Question
Delair's owners ask managers to justify any project against a 15% hurdle rate, well above the 9.71% cost of capital. At 15%, the cell's NPV is about minus $8,068, and since its IRR of 14.84% falls just short of the hurdle, it would be rejected.
This situation is common. In a survey of several hundred finance chiefs, Graham and Harvey (2001) reported that most relied on NPV and IRR to evaluate projects, and that many also relied on payback, especially at smaller firms. Jagannathan et al. (2016) found that the hurdle rates companies actually use are typically well above their estimated cost of capital, and that the gap was larger where firms faced constraints on managerial time or organizational capacity, as if they were rationing scarce attention to the best projects. For Delair, a high hurdle may make sense if engineering staff can manage only one major project this year and better uses are waiting. If not, rejecting a project that earns more than its cost of capital gives up value; the owners should decide which situation applies rather than apply 15% by habit.
Summary
The cost of capital is the bridge between how a firm is financed and which investments it should make. Delair's 9.71% WACC makes the robotic cell worthwhile, while a 15% hurdle would turn it down. The difference is not an arithmetic error but a management judgment about scarce capacity, and the analysis is most useful when it makes that judgment explicit.
References
Graham, J. R., & Harvey, C. R. (2001). The theory and practice of corporate finance: Evidence from the field. Journal of Financial Economics, 60(2-3), 187-243. https://doi.org/10.1016/S0304-405X(01)00044-7
Jagannathan, R., Matsa, D. A., Meier, I., & Tarhan, V. (2016). Why do firms use high discount rates? Journal of Financial Economics, 120(3), 445-463. https://doi.org/10.1016/j.jfineco.2016.01.012
Mayo, H. B., & Lavelle, M. (2024). Basic finance: An introduction to financial institutions, investments, and management (13th ed.). Cengage Learning.
Reading the FIN 3010 Module 6 assignment instructions
Module 6 of FIN-3010 covers the cost of capital and capital budgeting. Its written assignment consists of textbook exercises, so expect to compute the cost of debt after taxes, the cost of equity from a dividend model or the CAPM, the weighted average cost of capital, and project measures such as payback, NPV and IRR. Show the working for each, and for IRR list the calculator or spreadsheet inputs you used. Use market-value weights when they are given, and state which discount rate you apply to each project. Note which weights the exercise provides before computing WACC. Keep the component costs in a small table so the weighting step is easy to check.
How this FIN 3010 Module 6 example is built
The problems build in sequence on one company, so the cost of capital computed in the first three problems is the rate used in the fourth. Each problem uses the same layout of formula, calculation and answer, with a sentence on what the result means. The project evaluation reports payback, NPV and IRR side by side and explains why they agree. The fifth problem changes one assumption, the discount rate, to show how a common practice can reverse a decision, and uses two studies of how companies evaluate investments to explain the practice. A short summary states the lesson in one paragraph. The fifth problem changes only the discount rate, so its effect is isolated.
FIN 3010 Module 6 rubric: what earns full marks
Grading for this exercise set focuses on correct component costs, correct weights, a correct WACC, and correct application of capital budgeting methods with complete work. Common deductions include forgetting the tax adjustment on debt, using book rather than market weights when market values are given, discounting the initial investment, and reporting IRR without showing how it was found. Each solution should cite the exercise it answers. When an exercise asks for a recommendation, mentors look for a decision tied to the numbers, and for awareness that different methods or rates can change the answer. A recommendation that follows from the numbers earns the final points on decision questions.
FIN 3010 Module 6 help: mistakes that cost marks
Typical errors in this module include applying the tax adjustment to the cost of equity, which has no tax shield, and using the coupon rate instead of the yield to maturity for the cost of debt. In NPV problems, students sometimes discount the initial investment or omit salvage value in the final year. When IRR and NPV disagree, NPV is the more reliable guide. Always state the discount rate and why it fits the project's risk. Our tutors can work your assigned FIN 3010 Module 6 exercises with you and explain each calculation step by step. Confirm your IRR by plugging it back into the NPV formula.
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FIN 3010 Module 6 questions, answered
Where can I find a free FIN 3010 Module 6 sample paper?
The Module 6 exercises are solved here: original problems on the costs of debt and equity, WACC, and payback, NPV and IRR for a robotic cell, plus a hurdle rate comparison.
Why is the cost of debt adjusted for taxes?
Because interest lowers taxable income, debt really costs the firm its interest rate reduced by the tax saving, the rate times one minus the tax rate.
Should WACC weights use book or market values?
Market values are preferred because they reflect what investors would require to supply the company's capital today.
What if NPV and IRR disagree?
Go with NPV: it states in dollars what the project adds once cash flows are discounted at the firm's cost of capital.
Why do companies use hurdle rates above their cost of capital?
Research suggests firms raise hurdles when managerial time or organizational capacity is limited, effectively rationing attention to the best projects.