Northern Boat Mfg., Inc. has a weighted average cost of capital (WACC) of 16.8 p

Question

Northern Boat Mfg., Inc. has a weighted average cost of capital (WACC) of 16.8 percent, given the firm’s current boat-making operations. Home Builders, Inc. has a WACC of 14.4 percent, given that the firm builds new, single-family homes. Both firms are considering projects that would entail the construction of new, suburban, single-family homes. The projects for both firms have an estimated rate of return of 15.9 percent. Which firm(s), if either, should accept their building project?

A neither firm

B Home Builder’s, Inc. only

C both firms

D Northern Boat Mfg. only

Explanation / Answer

Northern Boat Mfg., Inc. has a weighted average cost of capital (WACC) of 16.8 percent, given the firm’s current boat-making operations. Home Builders, Inc. has a WACC of 14.4 percent, given that the firm builds new, single-family homes. Both firms are considering projects that would entail the construction of new, suburban, single-family homes. The projects for both firms have an estimated rate of return of 15.9 percent. Which firm(s), if either, should accept their building project?

B Home Builder’s, Inc. only

Note:

Home Builder’s, Inc has its WACC lower than estimated rate of return than its NPV is positive and therefore it would accept it where as Northern Boat Mfg.has its WACC greater than estimated rate of return than its NPV is negative therefore it would not accept it

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