Suppose Tapley Inc. uses a WACC of 8% for below-average risk projects, 10% for a

Question

Suppose Tapley Inc. 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 independent projects should Tapley accept, assuming that the company uses the NPV method when choosing projects? Answer Project A, which has average risk and an IRR = 9%. Project B, which has below-average risk and an IRR = 8.5%. Project C, which has above-average risk and an IRR = 11%. Without information about the projects' NPVs we cannot determine which project(s) should be accepted. All of these projects should be accepted.

Explanation / Answer

Project A - We are getting an IRR of 9%, but we REJECT it since its an average risk project we require a minimum return of 10%.
Project B - We are getting an IRR of 8.5%, but we ACCEPT it since its a below-average risk project we require a minimum return of 8%.
Project C - We are getting an IRR of 11%, but we REJECT it since its an above average risk project we require a minimum return of 12%.

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