Pilgrim's WACC is 12%. It has one opportunity to invest in a high risk project with an expected rate of return of 25%. It has another opportunity to lease a building to a government agency. The expected rate of return on the lease is 10%.

Question

Quizplus · Accepted Answer

Ideally, Pilgrim should discount the cash flows from each project at a rate appropriate to its risk. The WACC of 12% is not appropriate to use for both projects since one project has a higher level of risk and expected return. Pilgrim should determine a separate discount rate for each project based on its risk profile, and then decide whether to accept or reject each project based on their respective net present values.

Pilgrim's WACC Is 12