Hampton Manufacturing estimates that its WACC is 12.5%. The company is consideri

Question

Hampton Manufacturing estimates that its WACC is 12.5%. The company is considering the following seven investment projects Project Size $750,000 1,250,000 1,250,000 1,250,000 750,000 750,000 750,000 IRR 14.0% 13.5 13.2 13.0 12.7 12.3 12.2 a. 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 Project B Project C Project D Project E Project F Project G What is the firm's optimal capital budget? Write out your answer completely. For example, 13 million should be entered as 13,000,000 Select- -Select-

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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