WACC for Two Mutually Exclusive Projects That Are Being Considered

question 20

Multiple Choice

WACC for two mutually exclusive projects that are being considered is 8% Project K has an IRR of 20% while Project R's IRR is 15%The projects have the same NPV at the 8% current WACC However, you believe that money costs and thus your WACC will also increase You also think that the projects will not be funded until the WACC has increased, and their cash flows will not be affected by the change in economic conditions Under these conditions, which of the following statements is CORRECT?

• A) You should delay a decision until you have more information on the projects, even if this means that a competitor might come in and capture this market.
• B) You should recommend Project R, because at the new WACC it will have the higher NPV.
• C) You should recommend Project K, because at the new WACC it will have the higher NPV.
• D) You should recommend Project K because it has the higher IRR and will continue to have the higher IRR even at the new WACC.
• E) You should reject both projects because they will both have negative NPVs under the new conditions.

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Definitions:

Wages Expense

Represents the total amount of wages and salaries that a company pays to its employees for a specific period.

Wages Payable

Represents the total amount of unpaid wages that a company owes to its employees at a given point in time.

Store Supplies Expense

The cost associated with materials and supplies consumed during the operation of a retail store, recognized as an expense in the company's financial statements.

Adjusting Entry

An accounting journal entry made at the end of an accounting period to allocate income and expenditures to the period in which they actually occurred.