In: Finance
Hampton Manufacturing estimates that its WACC is 12.1%. The company is considering the following seven investment projects:
Project | Size | IRR | |||
A | $ 800,000 | 13.7 | % | ||
B | 1,100,000 | 13.2 | |||
C | 1,100,000 | 12.6 | |||
D | 1,200,000 | 12.4 | |||
E | 800,000 | 12.3 | |||
F | 800,000 | 11.7 | |||
G | 850,000 | 11.6 |
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? Write out your answer
completely. For example, 13 million should be entered as
13,000,000. Round your answer to the nearest dollar.
$
Project A | -Select-acceptdon't acceptItem 9 |
Project B | -Select-acceptdon't acceptItem 10 |
Project C | -Select-acceptdon't acceptItem 11 |
Project D | -Select-acceptdon't acceptItem 12 |
Project E | -Select-acceptdon't acceptItem 13 |
Project F | -Select-acceptdon't acceptItem 14 |
Project G | -Select-acceptdon't acceptItem 15 |
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. Round your answer to the nearest
dollar.
$
Project A | -Select-acceptdon't acceptItem 17 |
Project B | -Select-acceptdon't acceptItem 18 |
Project C | -Select-acceptdon't acceptItem 19 |
Project D | -Select-acceptdon't acceptItem 20 |
Project E | -Select-acceptdon't acceptItem 21 |
Project F | -Select-acceptdon't acceptItem 22 |
Project G | -Select-acceptdon't acceptItem 23 |
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. Round your answer to the nearest
dollar.
$
a. If the projects are independent, Company can accept all the projects that have IRR>WACC. Company can accept the projects from A to E.
The optimal capital budget=$800000+1100000+1100000+1200000+800000=$5,000,000
b. Project with higher NPV should be selected because IRR can change multiple items based on the market conditions. Project D has higher NPV at $450,000. Hence, Project D is to be selected
The optimal capital budget =$800000+1100000+1200000+800000=$3,900,000
c.Project A, WACC beomes=12.1%+2%=14.1% (high risk)
Project F, WACC becomes=12.1%-2%=10.1%
Project G, WACC becomes=12.1-2%=10.1%
For remaining projects B,C,D, E WACC remains unchanged at 12.1%
Now under independent senario, comapny can select all the projects except Project where its IRR<WACC.(13.7%<14.1%)
Project B,C,D,E,F and G can be selected
The optimal capital budget= $1100000+1100000+1200000+800000+800000+850000=$5,850,000