You are determining Magazines Unlimited\'s optimal capital budget for next year

Question

You are determining Magazines Unlimited's optimal capital budget for next year The firm can raise up to $200000 of new capital at a cost of 14.2 above that it costs 15.4 You have identified the following possible indivisible independent projects with the same risk as the firm's existing assets:

Project cost IRR

A $100,000 18%

B 80,000 16%

C 50,000 15%

According to the (erroneous) "marginal project" argument:

a. the optimal captial budget consists of Projects A and B.

b. the optimal capital budget totals $200,000.

c. Project C should be included in theo optimal capital budget.

d. the optimal capital budget totals $180,000.

e. both b and c above are true.

Explanation / Answer

Answer:

Because Project A and B given return higher than the marginal required rate of return 15.4%

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