Ziege Systems is considering the following independent projects for the coming y

Question

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

Ziege's WACC is 10.50%, but it adjusts for risk by adding 2% to the WACC for high-risk projects and subtracting 2% for low-risk projects.

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

If Ziege can only invest a total of $13 million, which projects should it accept?

If Ziege can only invest a total of $13 million, what would be the dollar size of its capital budget? Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55.

$   million

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?

What would be the dollar size of its capital budget? Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55.

$   million

Project Required
Investment Rate of
Return Risk A $4 million 14.5% High B 5 million 12 High C 3 million 10 Low D 2 million 10 Average E 6 million 13 High F 5 million 13 Average G 6 million 8 Low H 3 million 11.75 Low

Explanation / Answer

1)WACC for high risk projects = 12.50%

WACC for low risk projects = 8.50%

WACC for aveare risk projects = 10.5%

A C E F H projects can be accepted on no capital crieterion

2) if the investment can be maximum of 13 miillion then we select porjects with maximum return

hence

A E H projects should be accepted

dollar return = 4 * 1.1425 + 6 * 1.13 + 3 * 1.1175 = 14.7025 million

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