Question

Click here to read the eBook: The Optimal Capital Budget OPTIMAL CAPITAL BUDGET Hampton Manufacturing estimates that its WACC is 12.5%. The company is considering the following seven investment projects: Project Size IRR A $750,000 14.0% B 1,250,000 13.5 C 1,250,000 13.2 D 1,250,000 13.0 E 750,000 12.7 F 750,000 12.3 G 750,000 12.2 Assume that each of these projects is independent and that each is just as risky as the firm's existing assets. Which set of projects should be accepted? Project A -Select-Accept or no accept Project B -Select-Accept or no accept Project C -Select-Accept or no accept Project D -Select-Accept or no accept Project E -Select-Accept or no accept Project F -Select-Accept or no accept Project G -Select-Accept or no accept What is the firm's optimal capital budget? Write out your answer completely. For example, 13 million should be entered as 13,000,000. $ Now assume that Projects C and D are mutually exclusive. Project D has an NPV of $400,000, whereas Project C has an NPV of $350,000. Which set of projects should be accepted? Project A -Select-Accept or no accept Project B -Select-Accept or no accept Project C -Select-Accept or no accept Project D -Select-Accept or no accept Project E -Select-Accept or no accept Project F -Select-Accept or no accept Project G -Select-Accept or no accept What is the firm's optimal capital budget in this case? Write out your answer completely. For example, 13 million should be entered as 13,000,000. $ Ignore Part b and now assume that each of the projects is independent but that management decides to incorporate project risk differentials. Management judges Projects B, C, D, and E to have average risk, Project A to have high risk, and Projects F and G to have low risk. The company adds 2% to the WACC of those projects that are significantly more risky than average, and it subtracts 2% from the WACC of those projects that are substantially less risky than average. Which set of projects should be accepted? Project A -Select-Accept or no accept Project B -Select-Accept or no accept Project C -Select-Accept or no accept Project D -Select-Accept or no accept Project E -Select-Accept or no accept Project F -Select-Accept or no accept Project G -Select-Accept or no accept What is the firm's optimal capital budget in this case? Write out your answer completely. For example, 13 million should be entered as 13,000,000. $

Answer 1