A. $14 million B. $17 million C. $20 million D. $28 million 28. Cranberry Indust

Question

A. $14 million
B. $17 million
C. $20 million
D. $28 million

28. Cranberry Industries, Inc. is in the process of determining its optimal capital budget for next year. The following investment projects are under consideration:

Required                Expected Rate
Project            Investment            of Return
A $5 million            18.0%
B 5 million                15.0%
C 2 million                14.5%
D 2 million                14.0%
E 6 million                13.5%
F 3 million                13.0%
G 5 million                12.5%

The firm's marginal cost of capital schedule is as follows:

Amount of
Funds Raised Cost
$0 - $5 million 12.0%
$5 million - $10 million 12.5%
$10 million - $18 million        13.5%
Over $18 million 15.0%

Determine Cranberry's optimal capital budget (in dollars) for the coming year.

Explanation / Answer

According to above analysis of project we found that some project are benificeary or some are bad for investment point of view.

These Project are good for investment :-

Cranberry Industries, Inc may invest $14 million.

Because cost of capital of $14 million is $14 millon * 13.5% = $18,90,000

And earning from these investment is $19,82,016.

Surplus amount is $19,82,016.- $18,90,000 = $92,016.

So Ans is $14 million.

Project Required investment ($) Expected Rate of return cash flow in future P.V RATE Discountig factor Discounted cash flow Cost of investment A 50,00,000 18.0% 9,00,000 12.0% .8928 8,03,520 6,00,000 B 50,00,000 15.0% 7,50,000 12.0% 08928 6,69,600 6,00,000 C 20,00,000 14.5% 2,90,000 12.0% .8928 2,58,912 2,40,000 D 20,00,000 14.0% 2,80,000 12.0% .8928 2,49,984 2,40,000 E 60,00,000 13.5% 8,10,000 12.5% .8888 7,19,928 7,50,000 F 30,00,000 13.0% 3,90,000 12.0% .8928 3,48,192 3,60,000 G 50,00,000 12.5% 6,25,000 12.0% .8928 5,58,000 6,00,000

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