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

1. 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.
   $

2. 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.
   $

3. 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.
   $