Ziege Systems is considering the following independent projects for the coming y
ID: 2665227 • Letter: Z
Question
Ziege Systems is considering the following independent projects for the coming year:
Project Retained investment Rate of Return Risk
A $4 million 14.0% High
B 5 million 11.5 High
C 3 million 9.5 Low
D 2 million 9.0 Average
E 6 million 12.5 High
F 5 million 12.5 Average
G 6 million 7.0 Low
H 3 million 11.5 Low
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.
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 ?
Explanation / Answer
A simple practical approach to incorparate risk differences in projects is to adjust the firm WACC and use the adjusted WACC to evaluate investment . its Adjusted WACC =WACC +_ R (2%)
Low risk projects include modernisation and replacement projects
Medium risk projects include investment of expansion of current buisiness
High risk projects include diversification into new business
Project whose Rate of return is greater than WACC should be accepted.So A C E F H projects can be accepted on capital crieterion
Projects A, E,H should be accepted on basis return crieterion.
Project Retained Investment Rate of Return Risk WACC=10% +-2% A $4 million 14% High 12% B $5 million 11.50% High 12% C $3 million 9.50% Low 8% D $2 million 9% Average 10% E $6 million 12.50% High 12% F $5 million 12.50% Average 10% G $6 million 7.00% Low 8% H $3 million 11.50% Low 8%Related Questions
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