To assess which projects are acceptable, we calculate the NPV of each using the given after-tax cash flows and a WACC of 5%. If the NPV is positive, the project is acceptable as it is expected to yield a return greater than the cost of capital. The answer would depend on the actual calculation of the NPVs for projects S and R.
To determine which project(s) would be acceptable between projects S and R given a WACC of 5%, we need to calculate the Net Present Value (NPV) for each project. NPV is the sum of the present values of the cash flows over a period of time, adjusted for the cost of capital. In this case, we are given the after-tax cash flows for each year and the WACC, which we will use as our discount rate for calculating the present value of future cash flows.
Calculating NPV involves discounting each cash flow back to its present value and summing those values. A project with a positive NPV is considered acceptable because it is expected to generate more value than the cost of the capital invested. Conversely, a project with a negative NPV would be rejected because it does not cover the cost of capital.
For Project S, we would calculate the NPV by discounting each cash flow (year 1: 100; year 2: 200; year 3: 300) at 5% and summing these with the initial investment (year 0: -400). Similarly, for Project R, we would discount the cash flows (year 1: 150; year 2: 150; year 3: 250) and add them to the initial investment (year 0: -400).
Without doing the actual calculations here due to the lack of computational tools, in theory, if after performing these calculations both projects have a positive NPV, then both would be acceptable. If one project has a positive NPV and the other has a negative NPV, only the project with the positive NPV would be acceptable. If both have negative NPVs, neither would be acceptable.