Question

Midwest Water Works estimates that its WACC is 10.45%. 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% B 2 million 11.5 C 2 million 11.2 D 2 million 11.0 E 1 million 10.7 F 1 million 10.3 G 1 million 10.2 Accept or Dont Accept A through G.

Answer 1

Don't accept A-G

Accept only A-E

Explanation:

The company would those projects with a return of return equal to or higher than its cost of capital of 10.45%

Project A with a 12% return is acceptable.

Project B with a 11.5% rate of return is also acceptable

Project C has a rate of return of 11.2% , hence acceptable.

Project D has 11% rate of return and it is therefore acceptable.

Project E has 10.7% return rate and it is acceptable.

Project F has a lower rate of return of 10.3%, hence rejected, as well as projects G