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Question
Luxury Production Materials (LPM) generated the following information for its capital budgeting manager:
Capital Structure
Project Cost IRR Type of Capital Proportion
D $70,000 18.0% Debt 60.0%
E 65,000 15.0 Common equity 40.0
F 75,000 14.0
G 72,000 12.0
LPMs weighted average cost of capital (WACC) is 13 percent if the firm does not have to issue new common equity; if new common equity is needed, its WACC is 16 percent. If LPM expects to generate $80,000 in retained earnings this year, which project(s) should be purchased? Assume that the projects are independent and indivisible.
a. Only Project D should be purchased.
b. Projects D and E should be purchased.
c. Projects D, E, and F should be purchased.
d. All of the projects should be purchased.
e. None of the projects should be purchased.
Answer
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