Ziege Systems is considering the following independent projects for the coming year:

Ziege’s WACC is 10%, but it adjusts for risk by adding 2% to the WACC for high-risk projects and subtracting 2% for low-risk projects.

a. Which projects should Ziege accept if it faces no capital constraints?

b. If Ziege can only invest a total of $13 million, which projects should it accept and what would be the dollar size of its capital budget?

c. Suppose Ziege can raise additional funds beyond the $13 million, but each new increment (or partial increment) of $5 million of new capital will cause the WACC to increase by 1%. Assuming that Ziege uses the same method of risk adjustment, which projects should it now accept and what would be the dollar size of its capital budget?

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Rate of Required Project Investment Return Risk 14.0% High High A $4 million 5 million 11.5 B 3 million 9.5 Low 2 million 9.0 Average High Average 6 million 12.5 5 million 12.5 6 million 7.0 Low Н 3 million 11.5 Low