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The Ajax Corporation has the following set of projects available to it: Project Investment Required Expected Rate of Return ($ Million) (%) A 500 23
The Ajax Corporation has the following set of projects available to it:
|
Project |
Investment Required |
Expected Rate of Return |
|---|---|---|
|
($ Million) |
(%) |
|
| A | 500 | 23.0 |
| B | 100 | 18.0 |
| C | 50 | 21.0 |
| D | 125 | 16.0 |
| E | 300 | 14.0 |
| F | 150 | 13.0 |
| G | 250 | 19.0 |
Note: All projects have equal risk.
Calculate the cumulative investment and complete Ajax's schedule of potential projects. (Hint: Ajax prioritizes projects according to their expected rates of return.)
|
Project |
Investment Required |
Expected Rate of Return |
Cumulative Investment |
|---|---|---|---|
|
($ Million) |
(%) |
($ Million) |
|
| A | 500 | 23.0 | 500 |
| C | 50 | 21.0 | 550 |
| B | 100 | 18.0 | 900 |
| E | 300 | 14.0 | 1,325 |
|
|
What is the optimal capital budget (in millions) for Ajax? $1,025 $900 $1,300 $1,000 |
Expert Solution
Ans : Since Ajax prioritizes projects according to their expected rates of returns, will calculate the cumulative investments in order of highest to lowest of expected rate of returns
| Project | Investment Required ($ million) | Expected rate of return % | Cumulative Investment ($ millions) |
| A | 500 | 23 | 500 |
| C | 50 | 21 | 500 + 50 = 550 |
| G | 250 | 19 | 550 + 250 = 800 |
| B | 100 | 18 | 800 + 100 = 900 |
| D | 125 | 16 | 900 + 125 = 1025 |
| E | 300 | 14 | 1025 + 300 = 1325 |
| F | 150 | 13 | 1325 + 150 = 1475 |
Similiarly will calculate Cumulative funds raised in order of Cost of Capital from lowest to highest.
| Block of Funds ($) | Cost of Capital % | Cumulative Funds Raised $ |
| First 250 | 14 | 250 |
| Next 250 | 15.5 | 250 + 250 = 500 |
| Next 100 | 16 | 500 + 100 = 600 |
| Next 250 | 16.5 | 600 + 250 = 850 |
| Next 200 | 18 | 850 + 200 = 1050 |
| Next 200 | 21 | 1050 + 200 = 1250 |
The Optimal Capital Budget is the amount of capital invested at which marginal cost of capital equals the marginal return (i.e. expected rate of return in this case) from investing.
The Marginal cost of capital and marginal rate of return are euqal i.e. 18% at Capital investment of $900 million
Ans : Thus Optimal Capital Budget will be $900 million.
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