Answer to Question #6214 in Economics of Enterprise for LaMarcus Streeter

Question #6214
2. LaPango Inc. estimates that its average-risk projects have a WACC of 10%, its below-average risk projects have a WACC of 8%, and its above-average risk projects have a WACC of 12%. Which of the following projects (A, B, and C) should the company accept? a. Project B, which is of below-average risk and has a return of 8.5%. b. Project C, which is of above-average risk and has a return of 11%. c. Project A, which is of average risk and has a return of 9%. d. None of the projects should be accepted. e. All of the projects should be accepted.
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Expert's answer
2012-02-03T08:22:50-0500
Answer is A. When selecting from several different projects with Internal rate of return (IRR), selected project is with a maximum value of IRR of the same class. Thus Project B is the only one that has a return of 8.5% that is greater than projects of the same risk class.

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