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
Project B
Project C
Project D
Project E
Project F
Project G

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
Project B
Project C
Project D
Project E
Project F
Project G

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 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
Project B
Project C
Project D
Project E
Project F
Project G

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.