Question

PROJECT SELECTION

Midwest Water Works estimates that its WACC is 10.59%. The company is considering the following capital budgeting projects.

Assume that each of these projects is just as risky as the firm's existing assets and that the firm may accept all the projects or only some of them. Which set of projects should be accepted?

Project	Size	Rate of Return
A	$1 million	12.0%	-Select-AcceptDon't acceptItem 1
B	2 million	11.5	-Select-AcceptDon't acceptItem 2
C	2 million	11.2	-Select-AcceptDon't acceptItem 3
D	2 million	11.0	-Select-AcceptDon't acceptItem 4
E	1 million	10.7	-Select-AcceptDon't acceptItem 5
F	1 million	10.3	-Select-AcceptDon't acceptItem 6
G	1 million	10.2	-Select-AcceptDon't accept Item 7

Answer 1

Since the Midwest Water Works estimates that its WACC is 10.59%?, it can accept all those projects with return of more than this WACC of 10.59%. So  Midwest Water Works can accept all projects specified under, if it has no restriction on raising fund of $7million with this WACC of 10.59%.

Project	Size	Rate of Return
A	$1 million	12.0%	-Select-AcceptDon't acceptItem 1
B	2 million	11.5	-Select-AcceptDon't acceptItem 2
C	2 million	11.2	-Select-AcceptDon't acceptItem 3
D	2 million	11.0	-Select-AcceptDon't acceptItem 4

If the WACC goes more than 11%, it cannot accept project D, goes more than 11.2%, projects D &C, goes more than 11.5%, projects B, D &C, because the WACC or cost of overall fund does not exceed the rate of return.

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