OPTIMAL CAPITAL BUDGET Hampton Manufacturing estimates that its WACC is 12.5%. T

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OPTIMAL CAPITAL BUDGET

Hampton Manufacturing estimates that its WACC is 12.5%. The company is considering the following seven investment projects:

Assume that each of these projects is independent and that each is just as risky as the firm's existing assets. Which set of projects should be accepted?

What is the firm's optimal capital budget? Write out your answer completely. For example, 13 million should be entered as 13,000,000.
$ ANSWER

Now assume that Projects C and D are mutually exclusive. Project D has an NPV of $ 400,000, whereas Project C has an NPV of $350,000. Which set of projects should be accepted?

What is the firm's optimal capital budget in this case? Write out your answer completely. For example, 13 million should be entered as 13,000,000.
$ ANSWER

Ignore Part b and now assume that each of the projects is independent but that management decides to incorporate project risk differentials. Management judges Projects B, C, D, and E to have average risk, Project A to have high risk, and Projects F and G to have low risk. The company adds 2% to the WACC of those projects that are significantly more risky than average, and it subtracts 2% from the WACC of those projects that are substantially less risky than average. Which set of projects should be accepted?

What is the firm's optimal capital budget in this case? Write out your answer completely. For example, 13 million should be entered as 13,000,000.
$ ANSWER

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Solution

VERYIMPORTANT PROBLEM PLEASE HELP ME SOLVE ITS FOR IMPORTANT CLASS

OPTIMAL CAPITAL BUDGET

Hampton Manufacturing estimates that its WACC is 12.5%. The company is considering the following seven investment projects:

Project Size IRR A $750,000 14.0% B 1,250,000 13.5 C 1,250,000 13.2 D 1,250,000 13.0 E 750,000 12.7 F 750,000 12.3 G 750,000 12.2

Assume that each of these projects is independent and that each is just as risky as the firm's existing assets. Which set of projects should be accepted?

Project A -Select-AcceptDon't acceptItem 1 ANSWER SELECT ONE ACCEPT OR DONT ACCEPT Project B -Select-AcceptDon't acceptItem 2 {C}ANSWER SELECT ONE ACCEPT OR DONT ACCEPT Project C -Select-AcceptDon't acceptItem 3 ANSWER SELECT ONE ACCEPT OR DONT ACCEPT Project D -Select-AcceptDon't acceptItem 4 ANSWER SELECT ONE ACCEPT OR DONT ACCEPT {C} Project E -Select-AcceptDon't acceptItem 5 ANSWER SELECT ONE ACCEPT OR DONT ACCEPT Project F -Select-AcceptDon't acceptItem 6 ANSWER SELECT ONE ACCEPT OR DONT ACCEPT {C} Project G -Select-AcceptDon't acceptItem 7 ANSWER SELECT ONE ACCEPT OR DONT ACCEPT

What is the firm's optimal capital budget? Write out your answer completely. For example, 13 million should be entered as 13,000,000.
$ ANSWER

Now assume that Projects C and D are mutually exclusive. Project D has an NPV of $ 400,000, whereas Project C has an NPV of $350,000. Which set of projects should be accepted?

Project A -Select-AcceptDon't acceptItem 9 {C}ANSWER SELECT ONE ACCEPT OR DONT ACCEPT Project B -Select-AcceptDon't acceptItem 10 ANSWER SELECT ONE ACCEPT OR DONT ACCEPT Project C -Select-AcceptDon't acceptItem 11 ANSWER SELECT ONE ACCEPT OR DONT ACCEPT {C} Project D -Select-AcceptDon't acceptItem 12 ANSWER SELECT ONE ACCEPT OR DONT ACCEPT Project E -Select-AcceptDon't acceptItem 13 ANSWER SELECT ONE ACCEPT OR DONT ACCEPT {C} Project F -Select-AcceptDon't acceptItem 14 ANSWER SELECT ONE ACCEPT OR DONT ACCEPT Project G -Select-AcceptDon't acceptItem 15 ANSWER SELECT ONE ACCEPT OR DONT ACCEPT {C}

What is the firm's optimal capital budget in this case? Write out your answer completely. For example, 13 million should be entered as 13,000,000.
$ ANSWER

Ignore Part b and now assume that each of the projects is independent but that management decides to incorporate project risk differentials. Management judges Projects B, C, D, and E to have average risk, Project A to have high risk, and Projects F and G to have low risk. The company adds 2% to the WACC of those projects that are significantly more risky than average, and it subtracts 2% from the WACC of those projects that are substantially less risky than average. Which set of projects should be accepted?

Project A -Select-AcceptDon't acceptItem 17 ANSWER SELECT ONE ACCEPT OR DONT ACCEPT {C} Project B -Select-AcceptDon't acceptItem 18 ANSWER SELECT ONE ACCEPT OR DONT ACCEPT Project C -Select-AcceptDon't acceptItem 19 ANSWER SELECT ONE ACCEPT OR DONT ACCEPT {C} Project D -Select-AcceptDon't acceptItem 20 ANSWER SELECT ONE ACCEPT OR DONT ACCEPT Project E -Select-AcceptDon't acceptItem 21 ANSWER SELECT ONE ACCEPT OR DONT ACCEPT {C} Project F -Select-AcceptDon't acceptItem 22 ANSWER SELECT ONE ACCEPT OR DONT ACCEPT Project G -Select-AcceptDon't acceptItem 23 ANSWER SELECT ONE ACCEPT OR DONT ACCEPT {C}

What is the firm's optimal capital budget in this case? Write out your answer completely. For example, 13 million should be entered as 13,000,000.
$ ANSWER

Explanation / Answer

As the projects are as riksy as the firm, we will accept projects whose IRR is more than WACC of 12.5%
Hence, accept A,B,C,D,E for a optimal capital budget of 750000+1250000+1250000+1250000+750000=5250000

If projects C and D are mutually exclusive, we will accept higher NPV prjevt that is D..Hence, accept A,B,D,E for a optimal capital budget of 750000+1250000+1250000+750000=4000000

Project RADR
A 12.5+2=14.5%
B 12.5%
C 12.5%
D 12.5%
E 12.5%
F 12.5-2=10.5%
G 12.5-2=10.5%

Accept all projects whose IRR is more than RADR..Hence, accept B,C,D,E,F,G for a optimal capital budget of 1250000+1250000+1250000+750000+750000+750000=6000000

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