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Leslie Microcomputers is considering the following independent projects for the coming year: Project Required Investment Expected...

Leslie Microcomputers is considering the following independent projects for the coming year:


Project

Required
Investment

Expected
Rate of Return


Risk


X


$4 million


8.5%


High

Y

5 million

9.5%

Average

Z

3 million

4.5%

Low


Leslie’s WACC is 8 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. Which project(s) should Leslie accept assuming it faces no capital constraints?

a.

Project Z only
b.

Projects X and Z
c.

Project Y only
d.

Projects Y and Z
e.

Projects X and Y
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Answer #1

Cost of capital for X=8%+2%=10%
Cost of capital for Y=8%
Cost of capital for Z=8%-2%=6%

Accept Project Y only as it only has expected return more than cost of capital

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