Question

Brigham Chapter 10 End-of-Chapter Problems Problem 10-5 Project Selection Midwest Water Works estimates that its WACC is 10.50%. 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.

Answer 1

Firm will select only those project that will give benefit to their business.

Rule Accept project if Return of project is greater than funding cost.

Accept if ROR > WACC where ROR= rate of return on project, WACC = weighted average cost of capital

Selection Project ROR> WACC

YES A 12%>10.5%

YES B 11.5%>10.5%

YES C 11.2%>10.5%

YES D 11%> 10.5%

YES E 10.7%> 10.5%

NO F 10.3%< 10.5%

NO G 10.2%<10.5%

HENCE PROJECT A,B,C,D,E will be select .