A company estimates that an average-risk project has a WACC of 10 percent, a below-average-risk project has a WACC of 8 percent, and an above-average-risk project has a WACC of 12 percent. Which of the following independent projects should the company accept?
A) Project A has average risk and an IRR = 9 percent.
B) Project B has below-average risk and an IRR = 8.5 percent.
C) Project C has above-average risk and an IRR = 11 percent.
D) All of the projects above should be accepted.
E) None of the projects above should be accepted.

Question

Quizplus · Accepted Answer

The company should choose Project B because it has a below-average risk and its IRR of 8.5 percent is higher than its WACC of 8 percent. Projects A and C have IRRs that are below or equal to their respective WACCs, meaning that they would not generate enough return to cover the cost of capital. Therefore, these projects should not be accepted.

A Company Estimates That an Average-Risk Project Has a WACC