Question

A company with a WACC of 8.5% is considering two possible investments. Project A will return 10% and be financed using equity costing 9.5%. Project B will return 8% and be financed using debt costing 6%. Which project should the company undertake

Answer 1

Answer:

The Company should undertake project A.

Explanation:

The finance of projects is usually done through pooling of funds, that is using various sources of finance. The WACC represents the return required by providers of this finance and also shows the risk of the company.

A company will always accept projects that provide a return higher that their weighted average cost of capital (risk) and reject any project offering a return below the WACC.

Conclusion :

The Company should undertake project A as this gives a return higher than the WACC of 8.5%.