Hampton Manufacturing estimates that its WACC is 12% if equity comes from retained earnings. However, if the company issues new stock to raise new equity, it estimates that its WACC will rise to 12.5%. The company believes that it will exhaust its retained earnings at $3,250,000 of capital due to the number of highly profitable projects available to the firm and its limited earnings. The company is considering the following seven investment projects:

a. Assume that each of these projects is independent and that each is just as risky as the firm€™s existing assets. Which set of projects should be accepted, and what is the firm€™s optimal capital budget?
b. Now assume that Projects C and D are mutually exclusive. Project D has an NPV of $400,000, whereas Project C has an NPV of $350,000. Which set of projects should be accepted, and what is the firm€™s optimal capital budget?
c. Ignore Part b and assume that each of the projects is independent but that management decides to incorporate project risk differentials. Management judges Projects B, C, D, and E to have average risk; Project A to have high risk; and Projects F and G to have low risk. The company adds 2% to the WACC of those projects that are significantly more risky than average, and it subtracts 2% from the WACC of those projects that are substantially less risky than average. Which set of projects should be accepted, and what is the firm€™s optimal capital budget?

Project Size 750,000 1250,000 1,250,000 1250,000 750,000 750,000 750,000 14.0% 13.5 13.2 13.0 12.7 12.3 12.2