Question

Ch 10: End-of-Chapter Problems-LPK - The Cost Who wins LSU-Bama Sett eBook Ziege Systems is considering the following independent projects for the coming year: Required Investment Rate of Return Project Risk "$4 million 13.00% 10.50 High High 0 2 5 million 1 3 million 8.50 Low 2 million 8.00 Average 6 million 11.50 High 2 5 million 11.50 Average 6 million 6.00 Low 3 million 11.00 Ziege's WACC is 9.00%, but it adjusts for risk by adding 2% to the WACC for high-risk projects and subtracting 2% for low-risk projects. Projects a. Which projects should Ziege accept if it faces no capital constraints? 3 Project A Reject : Project A Reject & Project B Accept : OBS OAO7 wi pix]

Answer 1

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- 2x S 527 528 projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins % Cut Σ AutoSum : A Calibri 11 A A = = = V Wrap Text General Ea Copy Fill 2 m Paste B I U • a An E Merge & Center - $ % 48.. Format Painter Conditional Format Cell Insert Delete Format Sort & Find & Formatting as Table Styles 2 Clear Filter Select Clipboard Font Alignment Number Styles Cells Editing EK543 | EG EH EI EK EL EM EN EO EP EQ ER E ZEIGE NO CAPITAL CONSTRAINTS 529 PROJECT RISK WACC WACC RETURN ACCEPT/REJECT 530 HIGH 9% +2% 11% 13% ACCEPT ACCEPT IF RETURN > WACC 531 HIGH 9% +2% 11% 10.50% REJECT 532 LOW 9%-2% 7% 8.50% ACCEPT AVERAGE 9.00% 9% 8.00% REJECT 534 HIGH 9% +2% 11% 11.50% ACCEPT 535 AVERAGE 9.00% 9% 11.50% ACCEPT 536 LOW 9%-2% 7% 6.00% REJECT 537 LOW 9%-2% 7% 11.00% ACCEPT 538 539 ACCEPT THE FOLLOWING PROJECTS PROJECT 541 542 543 544 545 I RRnpvbeta RATION PBP ARR invest, EAA MI-np-ir_ REPLACEMENT S HPR GMAM EAC MACRS NPV RELEVANT BETA LEVERED REPLACEMENT BOND OPTION TO WAIT STIL Rea ferences: JF17 BOJ 130% - 533 < Uowu OI 540 I Tmn H > _+ 0 DO 4 * 4 OENG 08-11-2019

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Data Review View Add-Ins File Home Insert Page Layout Formulas - 2x % Cut Σ AutoSum : A Calibri A = = = V General A A Wrap Text Merge Merge & Center - Center B I U SF $ -% % 4:0 .00 . Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles Fill 2 Clear 11 B- Font for EI Sort & Find & Filter Select Editing Alignment Number E Copy Paste Format Painter Clipboard EK588 - EG 570 571 Cells EH EK EL EM EN EO Formula Bar EQ ER ESE 572 PROJECT INVESTMENT 573 574 OD TI EXCESS RETURN 3 4% -1 = 3% WACC INCREASES BY 1 %, SO EXCESS RETURN WILL DECREASE BY1% 5 2.5% -1 =1.5% 42% -1% -1% 3 1.5% -1 =0.5% NO FURTHER INVESTMENT WILL HAVE EXCESS RETURNS NOW 575 576 577 578 15 579 580 DOLLAR SIZE OF CAPITAL BUDGET = 15.00 MILLION 581 582 583 584 585 586 587 588 H invest, EAA MI-np-ir_ REPLACEMENT S HPR GMAM EAC MACRS NPV RELEVANT BETA LEVERED REPLACEMENT STIL > I RRnpvbeta RATION PBP ARR ferences: JF8 Rea BOND OPTION TO WAIT BOU 130% 9 * 0 ODOB ENG 08-11-2019