Question
Which of the projects will the company accept? The managers of Kenforest Grocers are trying to determine the company's optimal capital budget for the upcoming
Which of the projects will the company accept? The managers of Kenforest Grocers are trying to determine the company's optimal capital budget for the upcoming year. Kenforest is considering the following projects:
|
|
|
|
| (a) No budget limitation | (b) subject to budget | |
Project | Required investment (in millions) | Rate of Return | Risk-adjusted WACC | Excess Return | Ranking | Available Capital | Ranking |
A | $200 | 16.0% | |||||
B | 500 | 14.0 | |||||
C | 200 | 12.5 | |||||
D | 300 | 11.5 | |||||
E | 350 | 10.7 | |||||
F | 200 | 10.0 | |||||
G | 400 | 5.0 | |||||
Scenario 1: Which of the projects will the company accept? PLEASE SHOW WORK AND EXPLAIN
- Except for projects C and D are mutually exclusive, all the other projects are independent.
- Project A, D and F are high-risk project; project B and C are average-risk projects; while project E and G are low-risk project.
- The company estimates that its WACC is 8%. The company adjusts for risk by adding 2 percentage points to the WACC for high-risk projects, and subtracting 2 percentage points from the WACC for low-risk projects.
- The company has a limited capital budget at $900.
Select one:
a. A, B, C, D
b. A, B, C, D, E
c. A, B, D
d. A, B
e. A, B, C
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started