14-2, with comprehensive answer step-by-step please

14-2 OPTIMAL CAPITAL BUDGET Marble Construction estimates that its WACC is 10% 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 10.8%. The company believes that it will exhaust its retained earnings at $2,500,000 of capital due to the number of highly profitable projects avail- able to the firm and its limited earnings. The company is considering the following seven investment projects: Project A B Size IRR $ 650,000 14.0% 1,050,000 13.5 1,000,000 11.2 1,200,000 11.0 500,000 10.7 650,000 10.3 700,000 10.2 D E F G 143 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? INVESTMENT TIMING OPTION Digital Inc. is considering the production of a new cell phone. The project will require an investment of $15 million. If the phone is well received, the project will produce cash flows of $10 million a year for 3 years; but if the market does not like the product, the cash flows will be only $2 million per year. There is a 50% probability of both good and bad market conditions. Digital can delay the project a year while it conducts a test to determine whether demand will be strong Ortool. T