Suppose Tapley Corporation uses a WACC of 8% for below-average risk projects, 10% for average- risk projects, and 12% for above-average risk projects. Which of the following independent projects should Tapley accept, assuming that the company uses the NPV method when choosing projects?

Question

Quizplus · Accepted Answer

To choose the best project using the NPV method, we need to discount the cash flows of each project using the appropriate WACC. 
Project A has an IRR of 9%, which is less than the WACC of 10% for average-risk projects. Therefore, it may not generate enough return to justify the risk involved. 
Project C has an IRR of 11%, which is greater than the WACC of 12% for above-average risk projects. However, we need to consider the risk involved in achieving that return, and the higher risk may not be worthwhile.
Project B has an IRR of 8.5%, which is less than the WACC of 8% for below-average risk projects. However, we can accept below-average risk projects with a lower return of 8%. Therefore, Project B can be accepted. 
Without information about the projects' NPVs, we cannot determine which one(s) should be accepted. However, based on the information given, Project B is the best choice.

Suppose Tapley Corporation Uses a WACC of 8% for Below-Average