OPTIMAL CAPITAL BUDGET Hampton Manufacturing estimates that its WACC is 12.5%. Thecompany 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 eachis just as risky as the firm's existing assets. Which set ofprojects 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? Write out your answercompletely. For example, 13 million should be entered as13,000,000.
$ Now assume that Projects C and D are mutually exclusive. ProjectD 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-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? Writeout your answer completely. For example, 13 million should beentered as 13,000,000.
$ Ignore Part b and now assume that each of the projects isindependent but that management decides to incorporate project riskdifferentials. Management judges Projects B, C, D, and E to haveaverage risk, Project A to have high risk, and Projects F and G tohave low risk. The company adds 2% to the WACC of those projectsthat are significantly more risky than average, and it subtracts 2%from the WACC of those projects that are substantially less riskythan average. Which set of projects should be accepted? | 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? Writeout your answer completely. For example, 13 million should beentered as 13,000,000.
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