Answered: Project Size IRR A $ 650,000 14.0% B…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

OPTIMAL CAPITAL BUDGET Marble Construction estimates that its WACC is 10% if equity
comes from retained earnings. However, if the company issues new stock to raise new
equity, it estimates that its WACC will rise to 10.8%. The company believes that it will
exhaust its retained earnings at $2,500,000 of capital due to the number of highly profitable
projects available to the firm and its limited earnings. The company is considering the
following seven investment projects:

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?

Project
Size
IRR
A
$ 650,000
14.0%
B
1,050,000
13.5
1,000,000
1,200,000
11.2
11.0
E
500,000
10.7
F
650,000
10.3
700,000
10.2

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