Check My Work (1 remaining) eBook Problem 10-5 Project Selection Midwest Water W
ID: 2793562 • Letter: C
Question
Check My Work (1 remaining) eBook Problem 10-5 Project Selection Midwest Water Works estimates that its WACC is 10.52%. 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? 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
Explanation / Answer
To have a positive NPV and which would increase the value of the firm, a project should have rate of return more than WACC. So we must compare each project's rate of return with that to Midwest's WACC which is 10.52% and choose those projects with return > 10.52%
After careful consideration we suggest that Midwest Water Works should accept project A, B, C, D and E.