Five possible investment projects for the coming year. Project / Investment (Mil

Question

Five possible investment projects for the coming year.

Project / Investment (Millions)/ IRR
A/ $8 / 22%
B/ $10 / 18%
C/ $4 / 15%
D/ $4 / 13%
E/$2 / 10%

These don't line up right when submitted just so you know!

Weighted marginal cost of capital schedule is 12 percent for up to $23 million of investment; beyond $23 million the weighted cost of capital is 14 percent. The optimal budget is? Please Show work!
Ans: $18 million / $22 million / $26 million / $23 million

Explanation / Answer

So in order to accept a project we must satisfy this formula: IFF > marginal cost of capital We then would then figure out which project would work given the level of marginal capital. project E is never profitable under any circumstance while the other four would be if you start projects C and D under the first $23M and then projects A and B under the second piece above $23M at 14% marginal cost of capital. That would mean optimal budget would be 4 + 4 + 10 + 8 = $26M

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