Question

Ziege Systems is considering the following independent projects for the coming year:

Project	Required Investment	Rate of Return	Risk
A	$4 million	13.25%	High
B	5 million	10.75	High
C	3 million	8.75	Low
D	2 million	8.00	Average
E	6 million	11.75	High
F	5 million	11.75	Average
G	6 million	6.00	Low
H	3 million	10.50	Low

Ziege's WACC is 9.25%, but it adjusts for risk by adding 2% to the WACC for high-risk projects and subtracting 2% for low-risk projects.

1. Which projects should Ziege accept if it faces no capital constraints?

   Project A	-Select-AcceptRejectItem 1
   Project B	-Select-AcceptRejectItem 2
   Project C	-Select-AcceptRejectItem 3
   Project D	-Select-AcceptRejectItem 4
   Project E	-Select-AcceptRejectItem 5
   Project F	-Select-AcceptRejectItem 6
   Project G	-Select-AcceptRejectItem 7
   Project H	-Select-AcceptRejectItem 8

2. If Ziege can only invest a total of $13 million, which projects should it accept?

   Project A	-Select-AcceptRejectItem 9
   Project B	-Select-AcceptRejectItem 10
   Project C	-Select-AcceptRejectItem 11
   Project D	-Select-AcceptRejectItem 12
   Project E	-Select-AcceptRejectItem 13
   Project F	-Select-AcceptRejectItem 14
   Project G	-Select-AcceptRejectItem 15
   Project H	-Select-AcceptRejectItem 16

   If Ziege can only invest a total of $13 million, what would be the dollar size of its capital budget? Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answer to two decimal places.

   $    million

3. Suppose Ziege can raise additional funds beyond the $13 million, but each new increment (or partial increment) of $5 million of new capital will cause the WACC to increase by 1%. Assuming that Ziege uses the same method of risk adjustment, which projects should it now accept?

   Project A	-Select-AcceptRejectItem 18
   Project B	-Select-AcceptRejectItem 19
   Project C	-Select-AcceptRejectItem 20
   Project D	-Select-AcceptRejectItem 21
   Project E	-Select-AcceptRejectItem 22
   Project F	-Select-AcceptRejectItem 23
   Project G	-Select-AcceptRejectItem 24
   Project H	-Select-AcceptRejectItem 25

   What would be the dollar size of its capital budget? Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answer to two decimal places.

   $    million

Answer 1

2. In Question 2 we select project which offers higher Increased ROR thus we select Project H, F and A And Capital Budget = $12 Million

3. in Q 3 as we have to increase WACC by 1% if we go on selecting further projects we select project C as its ROR is greater than WACC of 8.25%(7.25+1%)

Thus Projects Selected = H F A & C

Capital Budget = $15 Million

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