Question

Which of the projects will the company accept? The managers of Kenforest Grocers are trying to determine the company's optimal capital budget for the upcoming year. Kenforest is considering the following projects:

					(a) No budget limitation	(b) subject to budget
Project	Required investment (in millions)	Rate of Return	Risk-adjusted WACC	Excess Return	Ranking	Available Capital	Ranking
A	$200	16.0%
B	500	13.5
C	400	12.5
D	1000	11.5
E	600	10.7
F	200	10.0
G	400	9.5

Scenario 1: Which of the projects will the company accept?

• Except for projects A and B are mutually exclusive, all the other projects are independent.
• Project A and C are high-risk project; project B and F are average-risk projects; while project D, E and G are low-risk project.
• The company estimates that its WACC is 11%. The company adjusts for risk by adding 2 percentage points to the WACC for high-risk projects, and subtracting 2 percentage points from the WACC for low-risk projects.
• The company has a limited capital budget at $1600.

Select one:

a. A, B, E

b. A, D, G

c. A, C, E, F

d. B, C, F

e. A, D

Answer 1

ANSWER : b : A,D,G