A company has the following marginal cost of capital schedule Capital (Millions)

ID: 2643567 • Letter: A

Question

A company has the following marginal cost of capital schedule

Capital (Millions)

Cost of Capital

0-30

12.5%

30-50

14.5%

Above 50

16.5%

If this company has the following independent capital projects for next year, what is the total capital that they need to raise?

Project ____Cost____ IRR

A $20 million 14.0%

B $15 million 15.0%

C $20 million 14.0%

D $10 million 16.0%

what is the total capital that they need to raise?

Capital (Millions)

Cost of Capital

0-30

12.5%

30-50

14.5%

Above 50

16.5%

If company start Project B and D:

Total Capital Required: 15 + 10 = $25 million

Cost of Capital = 25 x 12.50% = $3.125 million

Return: 15 x 15% = $2.25 million + 10 x 16% = $1.60 million. Total= $3.85 million

Net Return = 3.85 - 3.125 = $0.725 million

If Company Start Project C and D:

Total Capital Required: 20 + 10 = $30 million

Cost of Capital = 30 x 12.50% = $3.75 million

Return: 20 x 14% = $2.80 million + 10 x 16% = $1.60 million. Total= $4.40 million

Net Return = 4.40 - 3.75 = $0.65 million

So, the Total Capital that Company need to raise is $25 million. For Project B and D.

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