1.Puckett Inc. risk-adjusts its WACC to account for project risk. It uses a WACC
ID: 2635622 • Letter: 1
Question
1.Puckett Inc. risk-adjusts its WACC to account for project risk. It uses a WACC of 8% for below-average risk projects, 10% for average-risk projects, and 12% for above-average risk projects. Which of the following independentprojects should Puckett accept, assuming that the company uses the NPV method when choosing projects?
A. Without information about the projects' NPVs we cannot determine which project(s) should be accepted
B. project B, which has below-average risk and an IRR = 8.5%.
C. Project C, which has above-average risk and an IRR = 11%.
D. All of these projects should be accepted.
E.Project A, which has average risk and an IRR = 9%.
2. You have just landed an internship in the CFO's office of Hawkesworth Inc. Your first task is to estimate the Year 1 cash flow for a project with the following data. What is the Year 1 cash flow?
$13,000
$4,000
$6,000
35.0%
A. $6407 B. $6252 C. $5950 D. $6568 E. $6099
Please show work.Thank you :)
Sales revenues$13,000
Depreciation$4,000
Other operating costs$6,000
Tax rate35.0%
Explanation / Answer
1.E.Project A, which has average risk and an IRR = 9%. : Because the IRR>Cost of Capital (8%).
2.Cash Flow=
Income=Sales-Cost-Depriciation=(13000-6000-4000)=3000
Tax=0.35*3000=1050
Net Income=3000-1050=1950
Cash Flow=Net Income+Depriciation=1950+4000=5950
None of the options is correct.
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