Final answer:
The Mendoza Company must compare the present cost of equipment replacement with its future benefits' present discounted value, using a 10% discount rate.
Step-by-step explanation:
The Mendoza Company is evaluating the decision to replace equipment used for monitoring metal pipes in deep-sea drilling. They will need to consider the present costs of replacement and compare it with the present discounted value of future benefits.
By applying their pre-tax Weighted Average Cost of Capital (WACC) of 10%, they can discount future cash flows to ascertain whether the investment would be profitable.
When businesses like the Gizmo Company calculate financial returns, adding a 5% social benefit to the company's return rate reflects the broader societal gains. For instance, a 6% return for the company implies an 11% societal return. When the interest rate is 9% but the firm could include the 5% societal return, investment decisions are based on an effective return rate of 4%, leading to different investment levels.