Vang Enterprises, which is debt-free and finances only with equity from retained earnings, is considering 7 equal sized capital budgeting projects. Its CFO hired you to assist in deciding whether none, some, or all of the projects should be accepted. You have the following information: rRF = 4.50%; RPM = 5.50%; and b = 0.92. The company adds or subtracts a specified percentage to the corporate WACC when it evaluates projects that have above- or below-average risk. Data on the 7 projects are shown below. If these are the only projects under consideration, how large should the capital budget be?
|
|
Risk |
Expected |
Cost |
| Project |
Risk |
Factor |
Return |
(Millions) |
| 1 |
Very low |
2.00% |
7.60% |
$25.0 |
| 2 |
Low |
1.00% |
9.15% |
$25.0 |
| 3 |
Average |
0.00% |
10.10% |
$25.0 |
| 4 |
High |
1.00% |
10.40% |
$25.0 |
| 5 |
Very high |
2.00% |
10.80% |
$25.0 |
| 6 |
Very high |
2.00% |
10.90% |
$25.0 |
| 7 |
Very high |
2.00% |
13.00% |
$25.0 |