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Identifying the Appropriate Investment Proposal

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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%.

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Solution Summary

The solution identifies an appropriate investment proposal with suitable reasoning and eliminations of wrong answers.

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Solution:
a. Project C, which is of above-average risk and has a return of 11%.
Expected return of 11% is less than risk adjusted WACC of 12% (above risk project). ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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