A company estimates that its weighted average cost of capital (WACC) is 10 percent. Which of the following independent projects should the company accept?
A) Project A requires an up-front expenditure of $1,000,000 and generates a net present value of $3,200.
B) Project B has a modified internal rate of return of 9.5 percent.
C) Project C requires an up-front expenditure of $1,000,000 and generates a positive internal rate of return of 9.7 percent.
D) Project D has an internal rate of return of 9.5 percent.
E) None of the projects above should be accepted.

Question

Quizplus · Accepted Answer

Project A generates a net present value of $3,200, which is positive and greater than the up-front expenditure of $1,000,000. Therefore, it generates a return greater than the cost of capital (10 percent), making it the best choice. Projects B, C, and D have rates of return that are lower than the cost of capital, so they should not be accepted.

A Company Estimates That Its Weighted Average Cost of Capital