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WACC and Project NPV

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Midwest Water Works estimates that its WACC is 10.5 percent. The company is considering the following capital budgeting projects:

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%

Assume that each of these projects is just as risky as the firm's existing assets, and the firm may accept all projects or only some of them. Which set of projects should be accepted? Explain, and show all calculations.

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In terms of rate of return, the rule is to accept projects which have a rate of return greater than the WACC. This is because rate of return is the IRR for the ...

Solution Summary

The solution explains how to decide which projects to be accepted in 133 words.

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Finance: IRR, WACC, NPV, which project to accept

Project A has an internal rate of return of 15 percent. Project B has an IRR of 14 percent. Both projects have a cost of capital of 12 percent. Which of the following statements is most correct?

a. Both projects have a positive net present value.
b. Project A must have a higher NPV than Project B.
c. If the cost of capital were less than 12 percent, Project B would have a higher IRR than Project A.
d. Statements a and c are correct.
e. Statements a, b and c are correct.

Project X and Y have an IRR of 20% and 15% respectively. Both projects have a positive net present value. Which of the following statements is most correct?

a. Project X must have a higher NPV than Project Y.
b. If both projects have the same WACC, Project X must have a higher NPV.
c. Project X must have a shorter payback than Project Y.
d. Project X payback is shorter because it considered cash flows beyond the payback period.
e. None of the aobve answers is correct.

A company estimates that its WACC is 10 percent. Which of the following independent projects should the company accept?

a. Project A requires an up front expenditure of $1,000,000 and generates an NPV of $3000.
b. Project B has a modified internal rate of return of 9.5%.
c. Project C requires and up front expenditure of $1,000,000 and generates an IRR of 9.7%.
d. Project D has an IRR of 9.5%.
e. None of the projects above should be accepted.

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