A firm estimates that its average-risk projects have a WACC of 10%, its below-average risk projects...

A firm estimates that its average-risk projects have a WACC of 10%, its below-average risk projects have a WACC of 9%, and its above-average risk projects have a WACC of 12%. Which of the following projects (A, B, and C) should the company accept?

A:Project B is of below-average risk and has a return of 9.5%.

B:Project C is of above-average risk and has a return of 11.5%.

C:Project A is of average risk and has a return of 9%.

D:None of the projects should be accepted.

Solutions

Expert Solution

Option A is correct

Project B is of below-average risk and has a return of 9.5%

Project B is below average risk project and WACC of below average project is 9%,

Here,

Rate of Return of Project B is 9.5% which is greater than 9% so it should be accepted

jeff jeffy answered 2 years ago

Next > < Previous

Related Solutions

Suppose Tapley Inc. uses a WACC of 8% for below-average riskprojects, 10% for average-risk projects,...

Suppose Tapley Inc. uses a WACC of 8% for below-average risk projects, 10% for average-risk projects, and 12% for above-average risk projects. Which of the following independent projects should Tapley accept, assuming that the company uses the NPV method when choosing projects?A). Project A, which has average risk and an IRR = 9%.B). Project B, which has below-average risk and an IRR = 8.5%.C). Project C, which has above-average risk and an IRR = 11%.D). Without information about the projects'...

Suppose a firm estimates its WACC to be 10%. Should the WACC be used to evaluate...

Suppose a firm estimates its WACC to be 10%. Should the WACC be used to evaluate all of its potential projects, even if they vary in risk? If not, what might be "reasonable" costs of capital for average-, high-, and low-risk projects?

Your division is considering two projects. Its WACC is 10% (weighted average cost of capital, that...

Your division is considering two projects. Its WACC is 10% (weighted average cost of capital, that represent a firm’s cost of capital in which each category of capital is proportionately weighted), the projects’ after-tax cash flows (in millions of dollars) would be as follows: Project A 0 = - $30 1 = - $ 5 2 = $ 10 3 = $ 15 4 = 20 Project B 0 = - $ 30 1 = $ 20 2 = $10...

If a firm uses its WACC as the discount rate for all of the projects it...

If a firm uses its WACC as the discount rate for all of the projects it undertakes then the firm will tend to: I. reject some positive net present value projects. II. accept some negative net present value projects. III. favor high risk projects over low risk projects. IV. increase its overall level of risk over time. A. I and III only B. III and IV only C. I, II, and III only D. I, II, and IV only E....

Nihau Tech has equal amounts of low-risk, average-risk, and high-risk projects. The firm's overall WACC is...

Nihau Tech has equal amounts of low-risk, average-risk, and high-risk projects. The firm's overall WACC is 11%. The CFO, Ms Chen, believes that this is the correct WACC for the company's average-risk projects, but that a lower rate should be used for lower-risk projects and a higher rate for higher-risk projects. The CEO, Mr. Wu, disagrees, on the grounds that even though projects have different risks, the WACC used to evaluate each project should be the same because the company...

A company with an average WACC of 10% adjusts for risk by adding 2% for high...

A company with an average WACC of 10% adjusts for risk by adding 2% for high risk projects and subjecting 2% for low risk projects. Which of the following projects should the company accept? Only one option can be an answer. A)An average risk project with an IRR of 10% B)Low risk project with an IRR of 7% C)High risk project with an IRR of 13% D)High risk project with IRR of 11%

Capital budgeting criteria: mutually exclusive projects A firm with a WACC of 10% is considering the...

Capital budgeting criteria: mutually exclusive projects A firm with a WACC of 10% is considering the following mutually exclusive projects: 0 1 2 3 4 5 Project A -$250 $50 $50 $50 $200 $200 Project B -$600 $300 $300 $70 $70 $70 Which project would you recommend? Select the correct answer. I. Both Projects A and B, since both projects have IRR's > 0. II. Project A, since the NPVA > NPVB. III. Both Projects A and B, since both...

Capital budgeting criteria: mutually exclusive projects A firm with a WACC of 10% is considering the...

Capital budgeting criteria: mutually exclusive projects A firm with a WACC of 10% is considering the following mutually exclusive projects: Project A -$300 $75 $75 $75 $220 $220 Project B -$550 $250 $250 $80 $80 $80 Which project would you recommend? Select the correct answer. I. Both Projects A and B, since both projects have IRR's > 0. II. Project A, since the NPVA > NPVB. III. Project B, since the NPVB > NPVA. IV. Neither A or B, since...

A firm with a WACC of 10% is considering the following mutually exclusive projects: 0 1...

A firm with a WACC of 10% is considering the following mutually exclusive projects: 0 1 2 3 4 5 Project 1 -$250 $55 $55 $55 $190 $190 Project 2 -$650 $300 $300 $40 $40 $40 Which project would you recommend? Select the correct answer. a. Neither Project 1 nor 2, since each project's NPV < 0. b. Project 2, since the NPV2 > NPV1. c. Both Projects 1 and 2, since both projects have IRR's > 0. d. Both...

9) A firm with a WACC of 10% is considering the following mutually exclusive projects: 0...

9) A firm with a WACC of 10% is considering the following mutually exclusive projects: 0 1 2 3 4 5 Project 1 -$200 $70 $70 $70 $165 $165 Project 2 -$550 $300 $300 $130 $130 $130 Which project would you recommend? Select the correct answer. a. Neither Project 1 nor 2, since each project's NPV < 0. b. Project 2, since the NPV2 > NPV1. c. Both Projects 1 and 2, since both projects have IRR's > 0. d....

Subjects