If XYZ Corp. can undertake the following projects: Project 1: Required investmen

Question

If XYZ Corp. can undertake the following projects:

Project 1:
Required investment: $10 million
Expected rate of return: 12%

Project 2:
Required investment: $2 million
Expected rate of return: 15%

Project 3:
Required investment: $5 million
Expected rate of return: 10%

Project 4:
Required investment: $8 million
Expected rate of return: 17%

It can raise up to $10 million at a cost of capital of 10%
From $10 to $20 million at a cost of capital of 15%
Over $20 million, its cost of capital is 20%.

What is the amount of money (in millions) that will be raised and invested and why?

Explanation / Answer

Project 3 will not be invested because cost of capital = expected rate of return Out of remaining projects, Project 4 has the maximum expected rate of return. Therefore $8 million will be invested

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