(Determining

a firm's capital

budget)

Newcomb Vending Company manages soft drink dispensing machines in western Tennessee for several of the major bottling companies in the area. When a machine malfunctions, the company sends out a repair technician, and if he cannot repair it on the spot, he puts in a replacement machine so that the broken one can be taken to the firm's repair facility in Murfreesboro, Tennessee. Betsy Newcomb recently completed her BBA from a nearby university and has been trying to incorporate as much of what she learned as possible into the operations of her family business. Specifically, Betsy recently reviewed the firm's capital structure and estimated that the firm's weighted average cost of capital is approximately

12 %12%.

She hopes to help her father determine which of several major capital expenditures he should make in the current year based on a comparison of the rates of return she estimated for each project (that is, the internal rate of return) and the firm's cost of capital. Specifically, the firm is considering the following projects (ranked by their internal rate of return):

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.If all five of the investments being considered by Newcomb are of similar risk and that risk is very similar to that of the company as a whole, which project(s) should Betsy recommend the firm undertake? You may assume that the firm can raise all the capital it needs to fund its investments at the cost of capital of

12 %12%.

Explain your answer.

If the firm can raise all the capital it needs to fund its investments at the cost of capital of

12 %12%,

which project(s) should Betsy recommend the firm undertake?(Select the best choice below.)

A.Projects

Upper C comma Upper D comma and Upper EC, D, and E

because they offer the rates of return that are less than the firm's

12 %12%

cost of capital.

B.

Project E only because it offers the lowest rate of return.

C.Projects

Upper A and Upper BA and B

because they offer the rates of return that exceed the firm's

12 %12%

cost of capital.

D.

There is not enough information to make the investment decision.

E.

Project A only because it offers the highest rate of return.

budget) Newcomb Vending Company manages soft drink dispensing machines in western Tennessee for sever en a machine malfunctions, the company sends out a repair technician, and if he cannot repair it on the spot, her one can be taken to the firm's repair facility in Murfreesboro, Tennessee Betsy Newcomb recently completed he ing to incorporate as much of what she learned as possible into the operations of her family business. Specifically and estimated that the firm's weighted average cost of capital is approximately 12%. She hopes to help her father he should make in the current year based on a comparison of the rates of return she estimated for each project (th of capital. Specifically, the firm is considering the following projects (ranked by their internal rate of return): E s being considered by Newcomb are of similar risk and that risk is very similar to that of the company as a whole, w undertake? You may assume that the firm can raise all the capital it needs to fund its investments at the cost of cap Data Table (Click on the following icone in order to copy its contents into a spreadsheet.) PROJECT A B C D E INVESTED CAPITAL $ 350,000 1,200,000 900,000 700,000 1,350,000 INTERNAL RATE OF RETURN 16% 13% 10% 8% 6% Print Done nswer