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 10.54%. 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?

Project Size Rate of Return A $1 million 12.0% -Select-acceptdon't acceptItem 1 B 2 million 11.5 -Select-acceptdon't acceptItem 2 C 2 million 11.2 -Select-acceptdon't acceptItem 3 D 2 million 11.0 -Select-acceptdon't acceptItem 4 E 1 million 10.7 -Select-acceptdon't acceptItem 5 F 1 million 10.3 -Select-acceptdon't acceptItem 6 G 1 million 10.2 -Select-acceptdon't acceptItem 7

Explanation / Answer

The Midwest Water Works will accept those projects whose rate of return is higher than WACC.

Midwest Water will accept Project A, Project B, Project C, Project D and Project E.
Midwest Water will reject Project F and Project G.

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