i need an answer to the attached question in about 500 words

I have attached the scenario and the question. I need an answer in APA format and in about 500 words. References are important

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For this Discussion, imagine the following scenario:
You are the director of operations for your company, and your vice president wants to expand
production by adding new and more expensive fabrication machines. You are directed to build a
business case for implementing this program of capacity expansion. Assume the company’s
weighted average cost of capital is 13%, the after-tax cost of debt is 7%, preferred stock is 10.5%,
and common equity is 15%. As you work with your staff on the first cut of the business case, you
surmise that this is a fairly risky project due to a recent slowing in product sales. As a matter of fact,
when using the 13% weighted average cost of capital, you discover that the project is estimated to
return about 10%, which is quite a bit less than the company’s weighted average cost of capital. An
enterprising young analyst in your department, Harriet, suggests that the project be financed from
retained earnings (50%) and bonds (50%). She reasons that using retained earnings does not cost
the firm anything, since it is cash you already have in the bank and the after-tax cost of debt is only
7%. That would lower your weighted average cost of capital to 3.5% and make your 10% projected
return look great.
Based on the scenario above, post your reactions to the following questions and concerns:
What is your reaction to Harriet’s suggestion of using the cost of debt only? Is it a good idea or a bad
idea? Why? Do you think capital projects should have their own unique cost of capital rates for
budgeting purposes, as opposed to using the weighted average cost of capital (WACC) or the cost
of equity capital as computed by CAPM? What about the relatively high risk inherent in this project?
How can you factor into the analysis the notion of risk so that all competing projects that have
relatively lower or higher risks can be evaluated on a level playing field?

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