Question

Suppose William Inc. uses a WACC of 9% for below-average risk projects, 11% for average-risk projects, and 13% for above-average risk projects. Which of the following independent projects should William accept, assuming that the company uses the NPV method when choosing projects?

		Project A, which has average risk and an IRR = 12%.
		Project B, which has below-average risk and an IRR = 9.5%.
		Project C, which has above-average risk and an IRR = 13.5%.
		Without information about the projects' NPVs we cannot determine which one or ones should be accepted.
		All of these projects should be accepted as they will produce a positive NPV.

Answer 1

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

A project would have positive net present value (NPV) when Internal rate of return (IRR) is greater than cost of capital of projet.

Project-A

WACC = 11%

IRR = 12%

IRR > WACC, Thus, NPV of Project A would be positive.

Project-B

WACC = 9%

IRR = 9.5%

IRR > WACC, Thus, NPV of Project B would be positive.

Project-C

WACC = 13%

IRR = 13.5%

IRR > WACC, Thus, NPV of Project C would be positive.