Optimal capital budget

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

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-accept or don't accept
Project B	-Select-accept or don't accept
Project C	-Select-accept or don't accept
Project D	-Select-accept or don't accept
Project E	-Select-accept or don't accept
Project F	-Select-accept or don't accept
Project G	-Select-accept or don'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. $

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-accept or don't accept
Project B	-Select-accept or don't accept
Project C	-Select-accept or don't accept
Project D	-Select-accept or don't accept
Project E	-Select-accept or don't accept
Project F	-Select-accept or don't accept
Project G	-Select-accept or don'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. $

Ignore previous part, 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 for those that are substantially less risky than average. Which set of projects should be accepted?

Project A	(accept or don't accept)
Project B	(accept or don't accept)
Project C	(accept or don't accept)
Project D	(accept or don't accept)
Project E	(accept or don't accept)
Project F	(accept or don't accept)
Project G	(accept or don'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. $