Question

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) limit to $230 million
Project	Required investment (in millions)	Risk-adjusted WACC	NPV (in millions)	Profitability Index	Ranking	Available Capital	Ranking
A	$200		$50
B	70		45
C	150		40
D	30		30
E	120		20
F	100		5
G	50		-1
H	10		-5

Which of the projects will the company accept?

• Except for projects C and D 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, G and H are low-risk project.
• The company estimates that its WACC is 10.5%. 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 $230.

Select one:

a. B, D, E

b. B, C

c. B, D, G

d. A, D

e. B, D, F, H

Answer 1