The project development managers at Dog Voices Corporation are about to recommen
ID: 2725088 • Letter: T
Question
The project development managers at Dog Voices Corporation are about to recommend their final capital budget tor the next year. They have a self-imposed budget limit of $75,000 and their W AC C is 12%. Five independent projects are being considered. Hal Varian, the chief scientist and CEO, has minimal financial analysis experience and relies on his managers to recommend the projects that will increase the value of the firm by the greatest amount. Given the following summary of 5 projects, please explain the procedures for recommending projects that the managers will undergo, starting from the goals of the CEO.Explanation / Answer
Answer
Answer 1
Answer a)
Total budget limit is $ 75,000. So I will choose Projects Slobber Reducer, Self-Walker and Barking Translator. Total investment will be $ 70000 ($ 25000 + $ 30000 + $ 15000) which is within budget limit of $ 75000.
Answer b)
I will choose Projects Slobber Reducer, Self-Walker and Barking Translator because these 3 projects have highest IRR. Their IRR are well above WACC of 12% so their NPVs are also positive. Total investment requirement of all 3 projects is $ 70000 which is within budget of $ 75000.
Answer c)
When calculating NPV, Analysts are using a weighted average cost of capital (WACC) of 12% as a discount rate which is equal to lowest IRR of 12%.
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