Question
Wyle Manufacturing is considering the following capital projects. The internal rate of return (IRR) has been calculated for each project. Project Cost IRR (Millions of
Wyle Manufacturing is considering the following capital projects. The internal rate of return (IRR) has been calculated for each project.
Project | Cost | IRR |
---|---|---|
(Millions of dollars) | ||
A | $40 | 11.6% |
B | $40 | 11.2% |
C | $80 | 10.8% |
The optimal capital budget (OCB) is the budget size that maximizes the firms wealth given the opportunities for investment and the cost of capital. Wyles managers have plotted the marginal cost of capital (MCC) schedule to reflect how the cost of capital increases as new capital is raised. Assume that the proposed projects are independent and equally risky and that their risks are equal to Wyles average existing assets.
Refer to the preceding graph, and place the black point (X symbol) at the point that represents the OCB to find the answer.
What is Wyle Manufacturings optimal capital budget?
$80.0 million
$100.0 million
$90.0 million
$120.0 million
What is the companys weighted cost of capital (kaka) at the optimal capital budget?
11.0%
12.0%
10.8%
11.6%
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