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?

a.

Project A, which has average risk and an IRR = 9%.

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.

Without information about the projects' NPVs we cannot determine which one or ones should be accepted.

e.

All of these projects should be accepted as they will produce a positive NPV.

Explanation / Answer

Project B relevant WACC is lower than its IRR so project B will have a positive NPV. Project with positive NPV will increase firm value. So Project B should be accepted.

Hence, correct option is (b) Project B, which has below-average risk and an IRR = 8.5%.

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