Could someone help me step by step with this problem? Thank you! 10-5. PROJECT S
ID: 2668318 • Letter: C
Question
Could someone help me step by step with this problem? Thank you!10-5. PROJECT SELECTION Midwest Water Works estimates that its WACC is 10.5%. 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 that the firm may accept all the projects or only some of them. Which set of projects should be accepted? Explain.
Explanation / Answer
The company will accept all projects whose rate of return is greater than it's weighed average cost of capital. These projects will enhance shareholder value. So the projects that will be accepted are A, B,C,D,E because they all have rates of return higher than the WACC.