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:

Gray Market

The trade of a commodity through distribution channels that are legal but unintended by the original manufacturer.

Unauthorized Channels of Distribution

Routes to market that are not approved or sanctioned by the original manufacturer or trademark owner, often leading to grey market activities.

Haggling

The act of negotiating the price of a good or service between the buyer and seller, with the intent to agree on a lower price than initially offered.

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The underlying foundation of the economy consisting of physical systems like transportation, communication, and utilities that enable economic activities.