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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

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