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Question
A college intern working at Anderson Paints evaluated potential investments⎯that is, capital budgeting projects⎯using the firm's average required rate of return (WACC), and he produced the following report for the capital budgeting manager:
Project NPV IRR Risk
LOM $1,500 12.5% High
QUE 0 11.0 Low
YUP 800 9.5 Average
DOG (450) 10.0 Low
The capital budgeting manager usually considers the risks associated with capital budgeting projects before making her final decision. If a project has a risk that is different from average, she adjusts the average required rate of return by adding or subtracting 2 percentage points. If the four projected listed above are independent, which one(s) should the capital budgeting manager recommend be purchased?
a. Project LOM only, because it has both the highest NPV and the higher IRR.
b. Projects LOM, QUE, and YUP, because they all have positive NPVs and their IRRs.
c. Projects DOG and QUE, because their IRRs are greater than their risk-adjusted discount he projects returns are higher than the rates of return that capital budgeting manager uses to evaluate them.
d. Projects QUE, YUP, and DOG, because their IRRs are greater than their risk-adjusted discount rates-that is, the projects returns are higher than the rates of return that capital budgeting manager uses to evaluate them.
e. There is not enough information to answer this question, because the firm's average required rate of return cannot be determined.
Answer
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