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determine the company's optimal capital budget

Managers are trying to determine the company's optimal capital budget for the upcoming year. The company is considering the following projects:
Project Size Rate of Return Risk
A $ 200,000 16% High
B 500,000 14 Average
C 400,000 12 Low
D 300,000 11 High
E 100,000 10 Average
F 200,000 10 Low
G 400,000 7 Low
The company estimates that its WACC is 11 percent. All projects are independent. The company adjusts for risk by adding 2 percentage points to the WACC for high-risk projects and subtracting 2 percentage points from the WACC for low-risk projects. Which of the projects will the company accept?

a. A, B, C, E, F

b. B, D, F, G

c. A, B, C, E

d. A, B, C, F

Solution Preview

Project Size rate of return Risk Required rate of return
A $ 200,000 16% High 13% required return < expected return from project...Accept
B 500,000 14 ...

Solution Summary

Each condition is decided with a phrase or two to assist you.