Michigan Industries Has Three Projects Under Consideration

question 7

Essay

Michigan Industries has three projects under consideration.Project L is a lower-than-average-risk project,project A is an average-risk project,and project H is a higher-than-average-risk project.You have gathered the following information to determine if one or more of these projects has an acceptable rate of return for the firm.
• Sources of financing 50% debt and 50% equity
• R_d = 8.00% before taxes
• Tax Rate = 30%
• Average beta for Michigan Industries = 1.0
• R_m = 13.00%
• R_f = 4.00%
• Adjusted WACC = 9.30%
• Beta for project L = 0.80,for project A = 1.00,and for project H = 1.20
• IRR_L = 9.00%,IRR_A = 10.00%,and IRR_H = 11.00%
Calculate the required rate of return for each project and determine which,if any,projects are acceptable to the firm.

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Definitions:

Implicit Cost

The opportunity costs that are not directly paid or seen but represent real costs to a business, such as the value of time or resources.

Short Run

A period during which at least one of a firm's inputs is fixed, limiting the firm's capacity to adjust to market changes.

Long Run

A period in economics where all factors of production and costs are variable, allowing for full adjustment to changes in market conditions.

Lowest Price

The minimum price at which a product or service is available in the market.