a- 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?
b- Now assume that C and D are mutually exclusive. Project C has NPV of $300,000 while project D has NPV of $350,000. Which set of projects should be accepted?
c- Ignore part b, and assume that each of the projects is independent but the management decides to incorporate project risk differentials. Management judges Project B,C, and D to have average risk; project A to have high risk, and project E,F and G to have low risk. The company adds 2.5% to the WACC of those projects that are significantly more risk than average, and it subtract 2.5% from the WACC of those projects that are substantially less risky than average. Which set of projects should be accepted, and what is the firm new optimal capital budget.
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