LaPango Inc

question 93

Multiple Choice

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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Definitions:

Variable Cost

A cost that varies with the level of output or production, such as materials and labor directly involved in manufacturing.

Fixed Costs

Expenses that do not change with the level of goods or services produced by a business, such as rent or a salaried employee's wages.

Variable Costs

Expenses that change in proportion to the activity or volume of production, sales, or services rendered.

Fixed Costs

Charges that are unaffected by production or sales volume, for example, monthly rent or payroll expenses.