Takelmer Industries has a different WACC for each of three types of projects. Low-risk projects have an 8% WACC, average-risk projects a 10% WACC, and high-risk projects a 12% WACC. Which of the following projects do you recommend that the firm accept?

Project Level of Risk IRR

A Low 9.50%

B Average 8.50%

C Average 7.50%

D Low 9.50%

E High 14.50%

F High 17.50%

G Average 11.50%

a. A, B, C, D, and G

b. B, C, E, F, and G

c. A, D, E, F, and G

d. A, B, C, D, E, F, and G

c. A, D, E, F, and G

Explanation:

In capital budgeting, the IRR rule says that you accept a project if its Internal rate of return (IRR) is greater than its cost of capital (WACC). Your evaluation of each project should be based on this rule.

For A, IRR of 9.50% is > 8% WACC of low - risk projects, so the firm should accept it.

For B, IRR of 8.50% is <10% WACC of average - risk projects, so the firm should reject it.

For C, IRR of 7.50% is <10% WACC of average - risk projects, so the firm should also reject it.

For D, IRR of 9.50% is >8% WACC of low - risk projects, so the firm should accept it.

For E, IRR of 14.50% is >12% WACC of high - risk projects, so the firm should accept it.

For F, IRR of 17.50% is >12% WACC of high - risk projects, so the firm should accept it.

For G, IRR of 11.50% is >10% WACC of average - risk projects, so the firm should accept it.