Hampton Manufacturing estimates that its WACC is 12.5%.
The company is considering the following 7 investment projects:
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?
Extracted text: Project Size IRR A $ 750,000 14.0% 1,250,000 13.5 1,250,000 13.2 D 1,250,000 13.0 750,000 12.7 750,000 12.3 750,000 12.2