Problem 10-5 Project Selection Midwest Water Works estimates that its WACC is 10

Question

Problem 10-5
Project Selection

Midwest Water Works estimates that its WACC is 10.56%. The company is considering the following capital budgeting projects.

Assume that each of these projects is just as risky as the firm's existing assets and that the firm may accept all the projects or only some of them. Which set of projects should be accepted?

Size

Project

Size

Rate of Return A $1 million 12.0% -Select-accept OR don't accept B 2 million 11.5 -Select-accept OR don't accept C 2 million 11.2 -Select-accept OR don't accept D 2 million 11.0 -Select-accept OR don't accept E 1 million 10.7 -Select-accept OR don't accept F 1 million 10.3 -Select-accept OR don't accept G 1 million 10.2 -Select-acceptdon't acceptItem 7

Explanation / Answer

WACC of company is 10.56%. So company should choose only those projects which return is more than 10.56%.

Rate of return for project A, project B, project C, Project Dand project E is more than 10.56%. So these project should be accepted and remaining project E and Project F cannot be accepted because rate of return of these project is less than WACC, 10.56%.

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