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Ziege Systems is considering the following independent projects for the coming year: Required Investment Rate of Return Project Risk $4 million 15.00% > High 5 million 12.50 0 High 0 3 million 10.50 Low 2 million 9.50 0 Average 6 million 13.50 m High 5 million 13.50 Average I Low 6 million 7.50 Low 3 million 12.25 Ziege's WACC is 11.00%, but it adjusts for risk by adding 2% to the WACC for high-risk projects and subtracting 2% for low-risk projects. a. Which projects should Ziege accept if it faces no capital constraints? Project A Accept Project B Accept Project C Reject Project D Reject : Project E Accept Project F Accept Project G Reject Project H Accept b. If Ziege can only invest a total of $13 million, which projects should it accept? Project A -Select- Project B -Select- Project C -Select-

Answer 1

	a		A	B	C	D	E=B-C
		Project	Required Investment($ million)	Rate of Return	Risk	Required Return	Difference between returns	Accept/Reject
		A	$4	15.00%	High	13%	2.00%	Accept
		B	$5	12.50%	High	13%	-0.50%	Reject
		C	$3	10.50%	Low	9%	1.50%	Accept
		D	$2	9.50%	Average	11%	-1.50%	Reject
		E	$6	13.50%	High	13%	0.50%	Accept
		F	$5	13.50%	Average	11%	2.50%	Accept
		G	$6	7.50%	Low	9%	-1.50%	Reject
		H	$3	12.25%	Low	9%	3.25%	Accept
a	Decision Rule : Accept if E is Positive
b	If amount available for investment	$13	million
	Selected Project should be projects with highest value of E
		Project	E	Investment($million)	Cumulative Investment
		H	3.25%	$3	$3
		F	2.50%	$5	$8
		A	2.00%	$4	$12
	Dollar size of capital budget	$12	million
c	If $5 million is to the budget (ie Budget =13+5=$18million)
	Revised Required Return and Value of" E"
			A	B	C	D	E=B-C
		Project	Required Investment($ million)	Rate of Return	Risk	Required Return	Difference between returns
		A	$4	15.00%	High	14%	1.00%
		B	$5	12.50%	High	14%	-1.50%
		C	$3	10.50%	Low	10%	0.50%
		D	$2	9.50%	Average	12%	-2.50%
		E	$6	13.50%	High	14%	-0.50%
		F	$5	13.50%	Average	12%	1.50%
		G	$6	7.50%	Low	10%	-2.50%
		H	$3	12.25%	Low	10%	2.25%
		Project	E	Investment($million)	Cumulative Investment
		H	3.25%	$3	$3
		F	2.50%	$5	$8
		A	2.00%	$4	$12
		C	0.50%	$3	$15
	Dollar size of capital budget	$15	million