Question
Hampton Manufacturing estimates that its WACC is 12.5%. The company is considering the following seven investment projects: Project Size IRR A $750,000 14.0% B 1,250,000
Hampton Manufacturing estimates that its WACC is 12.5%. The company 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 |
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Assume that each of these projects is independent and that each is just as risky as the firm's existing assets. Which set of projects should be accepted?
Project A -Select-AcceptDon't accept Project B -Select-AcceptDon't accept Project C -Select-AcceptDon't accept Project D -Select-AcceptDon't accept Project E -Select-AcceptDon't accept Project F -Select-AcceptDon't accept Project G -Select-AcceptDon't accept What is the firm's optimal capital budget? Write out your answer completely. For example, 13 million should be entered as 13,000,000. $
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Now assume that Projects C and D are mutually exclusive. Project D 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 accept Project B -Select-AcceptDon't accept Project C -Select-AcceptDon't accept Project D -Select-AcceptDon't accept Project E -Select-AcceptDon't accept Project F -Select-AcceptDon't accept Project G -Select-AcceptDon't accept 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. $
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Ignore Part b and now assume that each of the projects is independent but that management decides to incorporate project risk differentials. Management judges Projects B, C, D, and E to have average risk, Project A to have high risk, and Projects F and G to have low risk. The company adds 2% to the WACC of those projects that are significantly more risky than average, and it subtracts 2% from the WACC of those projects that are substantially less risky than average. Which set of projects should be accepted?
Project A -Select-AcceptDon't accept Project B -Select-AcceptDon't accept Project C -Select-AcceptDon't accept Project D -Select-AcceptDon't accept Project E -Select-AcceptDon't accept Project F -Select-AcceptDon't accept Project G -Select-AcceptDon't accept 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. $
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