Question

Takelmer Industries has a different WACC for each of three types of projects. Lowrisk projects have a WACC of​ 8.00%, averagerisk projects a WACC of​ 10.00%, and highrisk projects a WACC of​ 12%. Which of the following projects do you recommend the firm​ accept? Project Level of Risk IRR A Low ​9.50% B Average ​8.50% C Average ​7.50% D Low ​9.50% E High ​14.50% F High ​17.50% G Average ​11.50% A. ​B, C,​ E, F, G B. ​A, D,​ E, F,​ G, C. ​A, B,​ C, D,​ E, F, G D. ​A, B,​ C, D, G

Answer 1

The correct option is B. ​A, D,​ E, F,​ G.

Step-by-step explanation:

IRR can described as the discount rate makes a project's net present value (NPV) to be equal to zero. Any rate that is higher than the IRR results in a negative NPV.

The weighted average cost of capital (WACC) can be described as cost of capital of a firm that is calculated by givng proportional weight to each category of capital of the firm.

For this question, the decision rule is therefore to reject any project that its IRR is less than its associated WACC.

The analysis can be done as follows:

Project Level of Risk IRR WACC Recommendation

A Low ​9.50% 8.00% Accept

B Average ​8.50% 10.00% Reject

C Average ​7.50% 10.00% Reject

D Low ​9.50% 8.00% Accept

E High ​ 14.50% 12% Accept

F High ​17.50% 12% Accept

G Average ​11.50% 10.00% Accept

Based on the analysis above, projects A, D,​ E, F and G are therefore recommended to the firm to accept.

Therefore, the correct option is B. ​A, D,​ E, F,​ G.