Midwest Water Works estimates that its WACC is 10.59%. The company is considerin

Question

Midwest Water Works estimates that its WACC is 10.59%. 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?

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Solution

Project Size Rate of Return A $1 million 12.0% -Select-acceptdon't acceptItem 1 B 2 million 11.5 -Select-acceptdon't acceptItem 2 {C} C 2 million 11.2 -Select-acceptdon't acceptItem 3 D 2 million 11.0 -Select-acceptdon't acceptItem 4 {C} E 1 million 10.7 -Select-acceptdon't acceptItem 5 F 1 million 10.3 -Select-acceptdon't acceptItem 6 {C} G 1 million 10.2 -Select-acceptdon't acceptItem 7

Explanation / Answer

Project A,B, C,D and E should be accepted as rate of return for these projects are greater than WACC

When rate of return is > WACC then project NPV is greater than 0 providing increased shareholder value.

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