Weston Systems is considering the following independent projects for the coming year: Project Required Investment Expected Rate of Return Risk X $8 million 12.5% High Y 8 million 9.5% Average Z 3 million 5.5% Low Weston’s WACC is 9 percent, but it adjusts for risk by adding 2 percent to the WACC for high-risk projects and subtracting 2 percent for low-risk projects. What would be the minimum acceptable return for each of the three projects? Which project(s) should Weston accept assuming it faces no capital constraints?
Weston Systems is considering the following independent projects for the coming year: Project Required Investment Expected Rate of Return Risk X $8 million 12.5% High Y 8 million 9.5% Average Z 3 million 5.5% Low Weston’s WACC is 9 percent, but it adjusts for risk by adding 2 percent to the WACC for high-risk projects and subtracting 2 percent for low-risk projects. What would be the minimum acceptable return for each of the three projects? Which project(s) should Weston accept assuming it faces no capital constraints?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Weston Systems is considering the following independent projects for the coming year:
|
Project |
Required Investment |
Expected |
Risk |
|
X |
$8 million |
12.5% |
High |
|
Y |
8 million |
9.5% |
Average |
|
Z |
3 million |
5.5% |
Low |
Weston’s WACC is 9 percent, but it adjusts for risk by adding 2 percent to the WACC for high-risk projects and subtracting 2 percent for low-risk projects.
- What would be the minimum acceptable return for each of the three projects?
- Which project(s) should Weston accept assuming it faces no capital constraints?
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