Question

Midwest Water Works estimates that its WACC is 10.46%. 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. Which set of projects should be accepted?

Project	Size	Rate of Return
A	$1 million	12.0%	-Select-AcceptDon't accept
B	2 million	11.5	-Select-AcceptDon't accept
C	2 million	11.2	-Select-AcceptDon't accept
D	2 million	11.0	-Select-AcceptDon't accept
E	1 million	10.7	-Select-AcceptDon't accept
F	1 million	10.3	-Select-AcceptDon't accept
G	1 million	10.2	-Select-AcceptDon't accept

Answer 1

Accept project which has rate of return more than WACC i.e. 10.46%

Project	Size	Rate of Return
A	$1 million	12.0%	Accept
B	2 million	11.5	Accept
C	2 million	11.2	Accept
D	2 million	11.0	Accept
E	1 million	10.7	Accept
F	1 million	10.3	Don't accept
G	1 million	10.2	Don't accept

Project which have rate of return below WACC will not be accepted because they will not add any value to equity of the firm.