you been asked to make recommendations regarding capital budgeting for IDK, Inc.

Question

you been asked to make recommendations regarding capital budgeting for IDK, Inc. Specifically,the company has identified 5 projects that it is considering undertaking. The projects are independent ofeach other, and if resources allowed, the company would be willing to undertake all projects. However,due to resource constraints, the company is able to undertake, at most, projects with a total initialinvestment of $750,000 or less. Expected betas and annual after tax cash flows for these projects are

Explanation / Answer

Rate = Riskless Rate + beta*(Expected market return - riskless rate)

Riskless rate = 3 %

Expected market retur = 8%

Rate = 3 +beta*5

For A: Rate = 3+1*5 = 8 %

For B: Rate = 3+ 0.7*5 = 6.5%

For C: Rate = 3+ 1.2*5 = 9%

For D: Rate = 3+ 1.3*5 = 9.5%

For E: Rate = 3+ 1*5 = 8%

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