XYZ Limited is a mid-sized manufacturing company operating in the industrial equipment sector. The company has been in operation for over 15 years…

XYZ Limited is a mid-sized manufacturing company operating in the industrial equipment sector. The company has been in operation for over 15 years and has established a strong market presence. As part of the annual financial review, the CFO has tasked you, a financial analyst, with analyzing the company's capital structure, determining the cost of capital components and evaluate a proposed investment project. The finance team has compiled the following information from the company's latest financial statements and market data: Balance Sheet Data (Book Values) Equity Share Capital:15 lakhsReserves & Surplus:5 LakhsBook Value of Debt:10 lakhs Market Data The market has assigned different valuations to the company's securities: Market Value of Equity: The current market valuation of equity is 3 times its book value Market Value of Debt: The current market valuation of debt is 2 times its book value Weighted Average cost of capital(WACC) The finance team has calculated the Weighted Average cost of capital of the firm under two different approaches: As per Book Value: 10%As per Market Value: 10.5% The company is considering a new project requiring an initial investment of 20 lakhs. The project has the following additional features: Working Capital Requirement: 3 lakhs (fully recoverable at end of Year 3) Salvage Value: 2 lakhs (end of Year 3) Depreciation: Straight-line over 3 years. Expected Cash Inflows (before depreciation & tax): Year Cash Inflows (₹ lakhs) 1 8 2 9 3 10 Assume the tax rate is 25% and the investment rate is 2% more than the Pre tax cost of debt. The project is evaluated based investment rate. Year 1 Year 2 Year 3 6% 0.943 0.890 0.840 8% 0.926 0.857 0.794 10% 0.909 0.826 0.751 12% 0.893 0.797 0.712