CAPITAL BUDGETING CRITERIA You must analyze two projects, X and Y. Each project costs $10,000, and the firm's WACC is 12%. The expected net cash flows are as follows: 1 2 4 Project X Project Y -$10,000 -$10,000 $6,500 $3,500 $3,000 $3,500 $3,000 $3,500 $1,000 $3,500 Calculate each projecť's NPV, IRR, MIRR, payback, and discounted payback. b. Which project(s) should be accepted if they are independent? c. Which project(s) should be accepted if they are mutually exclusive? a. с. How might a change in the WACC produce a conflict between the NPV and IRR rankings of the two projects? Would there be a conflict if WACC were 5%? (Hint: Plot the NPV profiles. The crossover rate is 6.21875%.) e. Why does the conflict exist?

CAPITAL BUDGETING CRITERIA You must analyze two projects, X and Y. Each project costs $10,000, and the firm's WACC is 12%. The expected net cash flows are as follows: 1 2 4 Project X Project Y -$10,000 -$10,000 $6,500 $3,500 $3,000 $3,500 $3,000 $3,500 $1,000 $3,500 Calculate each projecť's NPV, IRR, MIRR, payback, and discounted payback. b. Which project(s) should be accepted if they are independent? c. Which project(s) should be accepted if they are mutually exclusive? a. с. How might a change in the WACC produce a conflict between the NPV and IRR rankings of the two projects? Would there be a conflict if WACC were 5%? (Hint: Plot the NPV profiles. The crossover rate is 6.21875%.) e. Why does the conflict exist?

Fundamentals of Financial Management (MindTap Course List)

15th Edition

ISBN:9781337395250

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter11: The Basics Of Capital Budgeting

Section: Chapter Questions

Problem 11P: CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE PROJECTS Project S costs 17,000, and its expected...

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WACC AND OPTIMAL CAPITAL BUDGET Adams Corporation is considering four average-risk protects with the following costs and rates of return: Project Cost Expected Rate of Return 1 2,000 16.00% 2 3,000 15.00 3 5,000 13.75 4 2,000 12.50 The company estimates that it can Issue debt at a rate of rd = 10%, and its tax rate is 30%. It can issue preferred stock that pays a constant dividend of 500 per year at 4900 per share. Also, its common stock currently sells for 36.00 per share; the next expected dividend, D1 is 3.50; and the dividend is expected to grow at a constant rate of 6% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock. a. What is the cost of each of the capital components? b. What is Adams WACC? c. Only projects with expected returns that exceed WACC will be accepted. Which projects should Adams accept?
OPTIMAL CAPITAL BUDGET Hampton Manufacturing estimates that its WACC is 125%. 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 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, and what is the firm's optimal capital budget? b. 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, and what is the firm's optimal capital budget? c. Ignore Part b and 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, and what is the firm's optimal capital budget?
CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE PROJECTS Project S costs 17,000, and its expected cash flows would be 5,000 per year for 5 years. Mutually exclusive Project L costs 30,000, and its expected cash flows would be 8,750 per year for 5 years. If both projects have a WACC of 12%, which project would you recommend? Explain.
OPTIMAL CAPITAL BUDGET Hampton Manufacturing estimates that its VVACC is 125%. The company is considering the following 7 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 a. Assume that each of these projects is independent and that each is just as risky as the firms existing assets. Which set of projects should be accepted, and what is the firms optimal capital budget? b. 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, and what is the firms optimal capital budget? c. Ignore part b and 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, and what Is the firms optimal capital budget?