Midwest Water Works estimates that its WACC is 10.56%. The company is considerin

Question

Midwest Water Works estimates that its WACC is 10.56%. 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% -Select-AcceptDon't acceptItem 1 B 2 million 11.5 -Select-AcceptDon't acceptItem 2 C 2 million 11.2 -Select-AcceptDon't acceptItem 3 D 2 million 11.0 -Select-AcceptDon't acceptItem 4 E 1 million 10.7 -Select-AcceptDon't acceptItem 5 F 1 million 10.3 -Select-AcceptDon't acceptItem 6 G 1 million 10.2

Explanation / Answer

Rate of return is the internal rate of return of the project. Firm should accept all projects with IRR greater than its WACC. These projects will increase firm value.

Hence, A, B, C, D and E should be accepted.

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