Krile Industries Has Three Projects Under Consideration

question 71

Essay

Krile 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 Krile 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:

Property Rights

The legal rights to use, control, and derive benefits from a resource, good, or property.

Natural Resources

Materials or substances occurring in nature which can be exploited for economic gain, such as minerals, forests, water, and fertile land.

Economic Losses

Financial deficits that occur when costs exceed revenues, or when the economic value generated is less than the resources used.

Zero Economic Profit

A situation where total revenue equals total cost, meaning the firm is covering all its opportunity costs but is not making excess profit.