Midwest Water Works estimates that its WACC is 10.5%. The company is considering the following capital budgeting projects:

Project. Size. Rate of Return.

A. $1 million. 12.0%

B. 2 million. 11.5

C. 2 million. 11.2

D. 2 million. 11.0

E. 1 million. 10.7

F. 1 million. 10.3

G. 1 million. 10.2

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

Question

Vanessa Rangel

Business

18 March, 20:58

Midwest Water Works estimates that its WACC is 10.5%. The company is considering the following capital budgeting projects:

Project. Size. Rate of Return.

A. $1 million. 12.0%

B. 2 million. 11.5

C. 2 million. 11.2

D. 2 million. 11.0

E. 1 million. 10.7

F. 1 million. 10.3

G. 1 million. 10.2

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

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Answers (1)

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Kobe West · Answer 1

Projects A, B, C, D and E should be accepted

Explanation:

Based on the fact that each of the itemized projects has the same of level of risk as the company's existing assets, we suggest that the firm undertake those projects that gives a return rate which is above the current weighted average cost of capital of 10.5%

In essence, projects A, B, C, D and E should be accepted as they 12%,11.5%,11.2%,11% and 10.7% returns on investment respectively.

Projects F& G would be rejected on the premise that their rates of return are lower than what is currently obtainable in Midwest Water Works.