L) Coleman’s Director of capital budgeting has indentified the following potenti

Question

L) Coleman’s Director of capital budgeting has indentified the following potential projects
Project      Cost      Life         Cash Flow      IRR
A           $700,000    5 years   $218,795       17.0%
B           500,000      5           152,705          16.0
B*          500,000     20            79,881          15.0
C           800,000       5          219,185          11.5
Project B and B* are mutually exclusive, whereas the other projects are independent. All of the projects are equally risky.

1) Plot IOS schedule on the same graph that contains your MCC schedule. What is the firm’s marginal cost of capital for capital budgeting purposes?
2) What are the dollar size and the included projects in Coleman’s optimal capital budget? Explain your answer fully.
3) Would Coleman’s MCC schedule remain constant at 12.8 percent beyond $2 million regardless of the amount of capital required?

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