Question

Marble Construction estimates that its WACC is 10% if equity comes from retained earnings. However, if the company issues new stock to raise new equity, it estimates that its WACC will rise to 10.7%. The company believes that it will exhaust its retained earnings at $2,400,000 of capital due to the number of highly profitable projects available to the firm and its limited earnings. The company is considering the following seven investment projects:

Project	Size			IRR
A		$    640,000		13.8	%
B		1,010,000		13.4
C		1,040,000		11.2
D		1,240,000		11.1
E		520,000		10.4
F		640,000		9.8
G		700,000		9.9

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-acceptdon't acceptItem 1
Project B	-Select-acceptdon't acceptItem 2
Project C	-Select-acceptdon't acceptItem 3
Project D	-Select-acceptdon't acceptItem 4
Project E	-Select-acceptdon't acceptItem 5
Project F	-Select-acceptdon't acceptItem 6
Project G	-Select-acceptdon't acceptItem 7

What is the firm's optimal capital budget? Round your answer to the nearest dollar.

$  

Answer 1

	WACC =	10.70%
Project	Size	IRR	Accept / Reject
A	$      640,000.00	13.80%	Accept, IRR > WACC
B	$ 1,010,000.00	13.40%	Accept, IRR > WACC
C	$ 1,040,000.00	11.20%	Accept, IRR > WACC
D	$ 1,240,000.00	11.10%	Accept, IRR > WACC
E	$      520,000.00	10.40%	Reject
F	$      640,000.00	9.80%	Reject
G	$      700,000.00	9.90%	Reject
Company accept project that have IRR greater than WACC
So Company accept A,B,C,D because it has greater IRR than WACC
Project	Size
A	$      640,000.00
B	$ 1,010,000.00
C	$ 1,040,000.00
D	$ 1,240,000.00
Optimal Capital Budgeting	$ 3,930,000.00

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