PDQ Inc.has a weighted cost of capital of 14.6 percent and has an opportunity to invest in the following average risk projects:
Project Cost Annual Cost Flow Project life
$$\begin{array} { l l l l }
1 & \$ 10,000 & \$ 1,992.43 & 10 \text { years } \
2 & \$ 21,000 & \$ 4,526.84 & 8 \text { years } \
3 & \$ 18,500 & \$ 4,500.34 & 7 \text { years }
\end{array}$$
In which projects should PDQ invest? Assume no capital rationing.

Question

PDQ Inc.has a weighted cost of capital of 14.6 percent and has an opportunity to invest in the following average risk projects:
Project Cost Annual Cost Flow Project life
$$\begin{array} { l l l l } 
1 & \$ 10,000 & \$ 1,992.43 & 10 \text { years } \
2 & \$ 21,000 & \$ 4,526.84 & 8 \text { years } \
3 & \$ 18,500 & \$ 4,500.34 & 7 \text { years }
\end{array}$$
In which projects should PDQ invest? Assume no capital rationing.

Quizplus · Accepted Answer

IRR₁ = $10,000/$1,992.43 = 5.019 so IRR = 15%
IRR₂ = $21,000/$4,526.84 = 4.639 so IRR = 14%
IRR₃ = $18,500/$4,580.34 = 4.039 so IRR = 16%
Invest in projects 1 and 3 because their IRR is greater than 14.6%

PDQ IncHas a Weighted Cost of Capital of 14 In Which Projects Should PDQ Invest? Assume No Capital Rationing