Problem: Cochran Corporation has a weighted average cost of capital of 11% for projects of average risk. Projects of below-average risk have a cost of capital of 9%, while projects of above-average risk have a cost of capital equal to 13%. Projects A and B are mutually exclusive, whereas all other projects are independent. None of the projects will be repeated. The following table summarizes the cash flows, internal rate of return (IRR), and risk of each of the projects.
|
Year (t)
|
Project A
|
Project B
|
Project C
|
Project D
|
Project E
|
|
0
|
-$200,000
|
-$100,000
|
-$100,000
|
-$100,000
|
-$100,000
|
|
1
|
66,000
|
30,000
|
30,000
|
30,000
|
40,000
|
|
2
|
66,000
|
30,000
|
30,000
|
30,000
|
25,000
|
|
3
|
66,000
|
40,000
|
30,000
|
40,000
|
30,000
|
|
4
|
66,000
|
40,000
|
40,000
|
50,000
|
35,000
|
|
IRR
|
12.110%
|
14.038%
|
10.848%
|
16.636%
|
11.630%
|
|
Project Risk
|
Below average
|
Below average
|
Average
|
Above average
|
Above average
|
Which projects will the firm select for investment?