Question
The Great Company uses a process of capital rationing in its decision making. The firm's cost of capital is 13.00% The company is considering various
| The Great Company uses a process of capital rationing in its decision making. The firm's cost of capital is 13.00% |
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| The company is considering various projects and has determined the size and internal rate of return (IRR) for each project as follows: |
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| Project | Project Size ($) | IRR | ||||||||||
| A | 12,500 | 15.0% | ||||||||||
| B | 24,500 | 13.5% | ||||||||||
| C | 12,950 | 19.0% | ||||||||||
| D | 26,000 | 14.0% | ||||||||||
| E | 39,650 | 12.0% | ||||||||||
| F | 28,500 | 18.0% | ||||||||||
| G | 39,560 | 12.0% | ||||||||||
| REQUIRED: |
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- Which of the above projects are acceptable based on the Internal Rate of Return (IRR)?
- How much capital would the company require to accept all investments that meet or exceed the hurdle rate (i.e. acceptable)?
- If capital expenditure is limited to $80,000 (capital rationing) for the next year, what projects should the company accept?
- If projects D and F are mutually exclusive (i.e. the company cannot invest in both), would that affect your answer in part c? If so, what projects should be accepted in this case?
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Fundamentals of Corporate Finance
Authors: Robert Parrino, David S. Kidwell, Thomas W. Bates
3rd edition
1118845897, 978-1118845899
