The WACC for Two Mutually Exclusive Projects That Are Being

question 3

Multiple Choice

The 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:

Inspiratory Reserve Volume

The maximum volume of air that can be inhaled after a normal tidal inhalation.

Volume Measurement

The process of determining the three-dimensional space occupied by a liquid, solid, or gas, using various instruments or formulas.

Calculated

Determined or deduced by mathematical methods or processes.

Directly Measured

Refers to values or quantities obtained through direct observation or instrumentation, without reliance on estimation or indirect calculation.