In order to determine the optimal capital budget, given the available investment opportunities to the firm, one needs to look at the graph provided. The blue curve (that slopes downward in steps) graphs the available investment opportunities' IRR and level of investment. The orange curve (that slopes upward in steps) is the marginal cost of capital graph that denotes the capital being targeted and the corresponding cost associated with the same. The optimal capital budget is provided by the point of intersection of these two graphs.
As is observable, the optimal capital budget in this case is $ 80 million and the corresponding WACC at that level of capital is 11%
Avery Manufacturing is considering the following capital projects. The internal rate of return (IRR) has been...
Problem Walk-Through RESIDUAL DIVIDEND MODEL Walsh Company is considering three independent projects, each of which requires a $6 million investment. The estimated internal rate of return (IRR) and cost of capital for these projects are presented here: Project H (high risk): Project M (medium risk): Project L (low risk): Cost of capital-17% Cost of capital-15% Cost of capital = 8% IRR 22% IRR-11% Note that the projects' costs of capital vary because the projects have different levels of risk. The...
Capital Budgeting Decision Criteria: IRR IRR A project's internal rate of return (IRR) is the -Select-compound ratediscount raterisk-free rateCorrect 1 of Item 1 that forces the PV of its inflows to equal its cost. The IRR is an estimate of the project's rate of return, and it is comparable to the -Select-YTMcoupongainCorrect 2 of Item 1 on a bond. The equation for calculating the IRR is: CFt is the expected cash flow in Period t and cash outflows are treated...
You are considering the following two projects and can take only one. Your cost of capital is 11.2%. The cash flows for the two projects are as follows ($ million): Project Year 0 - $101 - $101 Year 1 $22 $52 Year 2 $29 $40 Year 3 $40 $29 Year 4 $52 $18 a. What is the IRR of each project? b. What is the NPV of each project at your cost of capital? c. At what cost of capital...
Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 10%. 0 1 2 3 4 Project A -1,250 700...
You are considering the following two projects and can take only one. Your cost of capital is 11.0%. The cash flows for the two projects are as follows ($ million): Project Year 4 Year 0 - $100 - $100 Year 1 $25 $50 Year 2 $30 $40 Year 3 $40 $30 $50 $20 a. What is the IRR of each project? b. What is the NPV of each project at your cost of capital? c. At what cost of capital...
You are considering the following two projects and can take only one. Your cost of capital is 11.0 %. The cash flows for the two projects are as follows (S million): Year 3 $40 $30 Year 0 -$100 -$100 Project Year 2 Year 4 Year 1 $50 $25 $50 $30 $40 $20 1,42 B a. What is the IRR of each project? b. What is the NPV of each project at your cost of capital? c. At what cost of...
2. Washington Corporation has the following capital structure. The company's before-tax cost of debt is 8 % The company's cost of preferred stock is 10%. The company's cost of common equity is 14.5 %. The company's tax rate is 30% . Debt Preferred Stock Capital Structure (in millions) $2,000 500 Common Equity Total 2.500 $5,000 a. What are weights for the capital structure? b. What is the company's WACC? c. If the company has the following proposed independent projects that...
Problem 8-27 (bookmatch) Question Help O You are considering the following two projects and can take only one. Your cost of capital is 11.0%. The cash flows for the two projects are as follows ($ million): Project Year 1 Year 0 - $100 - $100 $25 $50 Year 2 $30 $40 $30 Year 3 $40 $30 Year 4 $50 $20 a. What is the IRR of each project? b. What is the NPV of each project at your cost of...
Hampton Manufacturing estimates that its WACC is 12%. The company is considering the following seven investment projects: Project Size IRR $650,000 13.6% 13.1 В 1,050,000 12,5 1,050,000 C D. 1,200,000 12.3 600,000 E 12.2 F 600,000 11.6 650,000 11.5 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? -Select Project A -Select Project B -Select Project C Project D -Select Project...
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 WACCC is 9 %. 0 1 2 4 Project A...