Question

Weston Industries is considering the following independent projects for the coming year:

Project	Required Investment	Expected Rate of Return	Risk
X	$3 million	10.5%	High
Y	3 million	9.5%	Average
Z	7 million	6.5%	Low

Weston’s WACC is 9 percent, but it adjusts for risk by adding 2 percent to the WACC for high-risk projects and subtracting 2 percent for low-risk projects. Which project(s) should Weston accept assuming it faces no capital constraints?

	a.	Project Z only
	b.	Projects Y and Z
	c.	Projects X and Y
	d.	Projects X and Z
	e.	Project Y only

Answer 1

Project	Required Investment	Expected Rate of Return	Risk	Required rate of return = WACC+Risk Premium
X	$3 million	10.5%	High	11%
Y	3 million	9.5%	Average	9%
Z	7 million	6.5%	Low	7%

Hence, acceptable project is only Y since expected return is greater than required return

Hence, the answer is e.