Question

Taylor Inc. estimates that its average-risk projects have a WACC of 10%, its below-average risk projects have a WACC of 8%, 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 C, which is of above-average risk and has a return of 11%.
b. Project A, which is of average risk and has a return of 9%.
c. None of the projects should be accepted.
d. All of the projects should be accepted.
e. Project B, which is of below-average risk and has a return of 8.5%.

Answer 1

e. Project B, which is of below-average risk and has a return of 8.5%.

Step-by-step explanation:

E is the only one that should be accepted. A and B both have returns that are too low considering their risk and should be rejected (which means C and d is out as an answer as well).

Is important to consider the condition where the return should be higher than the WACC.