Two managers within a company are discussing capital budgeting projects. Manager 1 heads up Division A with average projects that are fairly safe and considered low risk. Division A's cost of capital is 10%. Manager 2 heads up Division B with average projects that are considered high risk.
Division B's cost of capital is 14%. Each division makes up 50% of the firm's revenues and assets. Two projects are being evaluated. Project S is a Division A type project that has an expected return of 11%, while Project R is a Division B type project that has an expected return of 13%. There is enough capital to accept both projects.
Acceptance of either or both projects doesn't change the firm's target capital structure. Manager 1 believes that Project S should be accepted and Project R should be rejected. Manager 2 believes that Project R should be accepted and Project S should be rejected.
Based on the concepts learned in this unit, discuss which project(s) should be accepted and explain your reasoning. Include in your discussion the concept of the firm's composite cost of capital (include a calculation for this firm) and the ramifications to the firm if the wrong project(s) is accepted.
The response addresses the queries posted in 398 words with references.
//The given discussion is based on the capital budgeting decisions of the two different managers working on two different decisions. In the first section of discussion, the actual position of both the divisions is explained in different aspects.//
In division A the cost of capital is 10% and project S is suitable in this division because it is an average project which is safe and has low risk. The expected rate of return in this project is 11%. In this case, returns are more than cost and there is profit of 1% (11%-10%). In ...
300 words report and excel file