Puckett Inc.risk-adjusts its WACC to account for project risk.It 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 Puckett accept, assuming that the company uses the NPV method when choosing projects?

Question

Quizplus · Accepted Answer

Puckett Inc. risk-adjusts its WACC, meaning it takes into consideration the risk associated with different projects. A project's IRR reflects its expected return and does not account for the risk involved. Therefore, we should compare the project's NPV to the initial investment after adjusting the WACC with the appropriate risk level. As Project B has below-average risk, its WACC would be 8%, which is less than its IRR of 8.5%. This indicates that the project is expected to yield a positive NPV and should be accepted. Projects A, C, and D do not provide enough information to determine which project(s) should be accepted, and Project E has an IRR of 9%, which is less than the WACC for average-risk projects. Therefore, it is unlikely to yield a positive NPV, and we cannot recommend its acceptance without more information.