Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)
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Chapter 12, Problem 5P

OPTIMAL CAPTTAL BUDGET Marble Construction estimates that its WACC is 10% if equity comes from retained earnings. However, if the company issues new stock to raise new equity, it estimates that its WACC will rise to 10.8%. The company believes that it will exhaust its retained earnings at $2,500,000 of capital due to the number of highly profitable projects available to the firm and its limited earnings. The company is considering the following seven investment projects:

Project Size IRR
A $ 650,000 14.0%
B 1,050,000 13.5
C 1,000,000 11.2
D 1,200,000 11.0
E 500,000 10.7
F 650,000 10.3
G 700,000 10.2

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, and what is the firm's optimal capital budget?

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Quantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 11%.   0 1 2 3 4                       Project A -1,350 650 365 220 270 Project B -1,350 250 300 370 720 What is Project A's MIRR? Do not round intermediate calculations. Round your answer to two decimal places.  % What is Project B's MIRR? Do not round intermediate calculations. Round your answer to two decimal places.  % If the projects were independent, which project(s) would be accepted according to the MIRR method?   If the projects were mutually exclusive, which project(s) would be…
Quantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 11%.   0 1 2 3 4                       Project A -1,200 600 450 330 300 Project B -1,200 400 330 410 745 What is Project Delta's IRR? Do not round intermediate calculations. Round your answer to two decimal places. _____% What is the significance of this IRR? It is the_____, after this point when mutually exclusive projects are considered there is no conflict in project acceptance between the NPV and IRR approaches.

Chapter 12 Solutions

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)

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What is WACC-Weighted average cost of capital; Author: Learn to invest;https://www.youtube.com/watch?v=0inqw9cCJnM;License: Standard YouTube License, CC-BY