LaPango Inc

question 93

Multiple Choice

LaPango Inc.estimates that its average-risk projects have a WACC of 10%,its below-average risk projects have a WACC of 8%,and its above-average risk projects have a WACC of 12%.Which of the following projects (A,B,and C) should the company accept?

• A) Project B,which is of below-average risk and has a return of 8.5%.
• B) Project C,which is of above-average risk and has a return of 11%.
• C) Project A,which is of average risk and has a return of 9%.
• D) None of the projects should be accepted.
• E) All of the projects should be accepted.

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Definitions:

Net Operating Income

The amount of profit a company makes from its normal business operations, excluding any income or costs from investments and other non-core business activities.

Sales Volume

The quantity of goods or services sold by a company within a specific period, used to measure business performance.

High-Low Method

An accounting technique used to estimate fixed and variable costs based on the highest and lowest levels of activity or cost.

Variable Cost

A cost that changes in direct proportion to changes in the level of business activity or output.