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Which of the following projects should the firm accept?

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2. Bloom and Co. has no debt or preferred stockit uses only equity capital, and has two equally- sized divisions. Division X's cost of capital is 10.0%, Division Y's cost is 14.0%, and the corporate (composite) WACC is 12.0%. All of Division X's projects are equally risky, as are all of Division Y's projects. However, the projects of Division X are less risky than those of Division Y. Which of the following projects should the firm accept?

a. A Division Y project with a 12% return.
b. A Division X project with an 11% return.
c. A Division X project with a 9% return.
d. A Division Y project with an 11% return.
e. A Division Y project with a 13% return.

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Solution:

b. A Division X project with an 11% return.

Reason: The 11% return is higher than the Division X's cost of capital ...

Solution Summary

The solution explains the projects that can be accepted and rejected.

$2.19
See Also This Related BrainMass Solution

Abel Athletics is considering purchasing new manufacturing equipment that costs $1,300,000 and is expected to improve cash flows by $500,000 in year 1, $350,000 in year 2, $475,000 in year 3, $450,000

Abel Athletics is considering purchasing new manufacturing equipment that costs $1,300,000 and is expected to improve cash flows by $500,000 in year 1, $350,000 in year 2, $475,000 in year 3, $450,000 in year 4, and $300,000 in year 5.

Key financial metrics for this capital budgeting project have been calculated and provided by the Finance department (see below). A 14% rate of return and a payback period of less than five years are required for the project. These key metrics must include (1) payback period, (2) net present value, and (3) internal rate of return. (Use 6% as the weighted average cost of capital).

Year 0
Year 1
Year 2
Year 3
Year 4
Year 5

(1,300,000)
500,000
350,000
475,000
450,000
300,000

pv

438,596
269,314
320,611
266,436
155,811

NPV

150,768

IRR

19%

payback

800,000
450,000
(25,000)
(475,000)
(775,000)

MIRR

17%

In a memo to the CFO, discuss the metrics and make a recommendation whether to accept or reject the project.

Objective: Use effective communication techniques.
Calculate the payback period, net present value, internal rate of return, and modified rate of return for a proposed capital budgeting project.

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