Fundamentals of Financial Management (MindTap Course List)
14th Edition
ISBN: 9781285867977
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
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Chapter 13, Problem 5P
OPTIMAL CAPITAL BUDGET Hampton Manufacturing estimates that its VVACC is 125%. The company is considering the following 7 investment projects:
| Project | Size | |
| 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?
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Chapter 13 Solutions
Fundamentals of Financial Management (MindTap Course List)
Ch. 13 - Explain in general terms what each of the...Ch. 13 - Would a failure to recognize growth options tend...Ch. 13 - Companies often have to increase their initial...Ch. 13 - How might a firms corporate WACC be affected by...Ch. 13 - Prob. 5QCh. 13 - GROWTH OPTION Martin Development Co. is deciding...Ch. 13 - OPTIMAL CAPITAL BUDGET Marble Construction...Ch. 13 - INVESTMENT TIMING OPTION Digital Inc. is...Ch. 13 - ABANDONMENT OPTION The Scampini Supplies Company...Ch. 13 - OPTIMAL CAPITAL BUDGET Hampton Manufacturing...
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