Question

you been asked to make recommendations regarding capital budgeting for IDK, Inc. Specifically,the company has identified 5 projects that it is considering undertaking. The projects are independent ofeach other, and if resources allowed, the company would be willing to undertake all projects. However,due to resource constraints, the company is able to undertake, at most, projects with a total initialinvestment of $750,000 or less. Expected betas and annual after tax cash flows for these projects are

:

Year

Project Beta 0 1 2 3 4 5

A. 1.00 -175,000, 60,000 75,000 80,000 55,000 60,0000

B. 0.70 -200,000 90,000 70,000 60,000 80,000 55,000

C. 1.20 -225,000 100,000 60,000 75,000 115,000 70,000

D. 1.30 -250,000 100,000 95,000 80,000 105,000 85,000

E. 1.00 -275,000 90,000 95,000 105,000 105,000 85,000

The riskless rate is 3%, and the company wishes tobase its analysis on an expected market return of 8%.

The company tax rate is 40%.

The company has 3 million shares of common stock outstanding. The most recent dividend on these

shares was $2.00, and dividends are expected to grow at 6%. The shares trade in the market at $25.

The company other source of funding is a 10-year bond issue, with $50m face value and a 8% coupon,

currently trading to yield 9%.

1) Capital Budgeting Criteria

For each project, calculate NPV, Payback, and Modified IRR. Use the companys WACC as the financing

and reinvestment rates to calculate the MIRR.

Create a table containing the values of these criteria for each project. Include a brief description of each

criteria for the CEO, who does NOT have a finance background.

2) Your decision

State clearly which project(s) you recommend the company undertake, and briefly explain your reasoning

.

e