The WACC for Two Mutually Exclusive Projects That Are Being

question 52

Multiple Choice

The WACC for two mutually exclusive projects that are being considered is 12%.Project K has an IRR of 20% while Project R's IRR is 15%.The projects have the same NPV at the 12% current WACC.Interest rates are currently high.However, you believe that money costs and thus your WACC will soon decline.You also think that the projects will not be funded until the WACC has decreased, 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 R because it will have both a higher IRR and a higher NPV under the new conditions.
• E) You should reject both projects because they will both have negative NPVs under the new conditions.