Taylor Inc.estimates that its average-risk projects have a WACC of 10%, its below-average risk projects have a WACC of 8%, and its above-average risk projects have a WACC of 12%.Which of the following projects (A, B, and C) should the company accept?
A) Project C, which is of above-average risk and has a return of 11%.
B) Project A, which is of average risk and has a return of 9%.
C) None of the projects should be accepted.
D) All of the projects should be accepted.
E) Project B, which is of below-average risk and has a return of 8.5%.

Question

Quizplus · Accepted Answer

Project B has a return of 8.5%, which is higher than its below-average risk WACC of 8%. Therefore, it should be accepted. Project A has a return of 9%, which is lower than its average-risk WACC of 10%. Therefore, it should not be accepted. Project C has a return of 11%, which is lower than its above-average risk WACC of 12%. Therefore, it should not be accepted. As a result, only Project B should be accepted.