Capital Budgeting the Beta for Case Study

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1

0.107

0.107

1.788005

4.37%

7.24%

D 20 Lev

1.2925

0.120475

0.11038

1.653411

4.05%

7.22%

D 50 Lev

1.87

0.1609

0.16045

-0.1731

-0.44%

7.05%

5. The only project that is unacceptable is Project D. At the 50% leverage level. This has a negative NPV. The other projects at each leverage level all have positive net present values. The following graph shows the NPVs for the different projects:

6. My objective in making this decision is to maximize firm value. The projects are mutually exclusive. I would use NPV as the main criteria. This means that Project B. is the most desirable, at the zero leverage level. Project A is the second-most desirable, against at the zero leverage level. Project C. is the third-most desirable. Project D. is the least desirable and at the 50% leverage level is unacceptable. I feel that it is best to use NPV has the criteria because the return on uninvested capital is going to be low. Thus, although the highest level of IRR is with Project C, that project leaves $6 million uninvested, which is to the detriment of the firm. If the firm had another project to which it could put that $6 million, then perhaps Project C. would become the most attractive option.

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However, with that $6 million uninvested, Project B. is the best option on the basis of its higher net present value.

7. I recommend Project B. because it has the highest NPV. The uninvested capital makes Project C. A lesser option. Project A leaves no uninvested capital but it has a lower NPV and IRR than Project B. Project D. offers low returns and has some uninvested capital, making is the worst of both worlds.

8. I recommend for Project B. that we use the 20/80 capital structure. This capital structure has an NPV of $5.36, which is higher than the NPV for any other project. This capital structure also has a higher MIRR than the zero leverage scenario, making it a better choice. The 50/50 structure has an even higher MIRR, but has a relatively low NPV, so low that if chosen would negate the rationale for choosing Project B. In the first place. Thus, 20% debt is the ideal capital structure for….....

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