1.Following are three independent projects Peanut/ Pecan Processing (PPP) is evaluating:
Project
IRR
RISK
P
10%
Low
Q
12%
Average
R
14.5%
High
PPP generally considers risk when examining projects by adjusting its average required rate of return, r, which equals 11 percent. A 4 percent adjustment is made for high-risk projects, and a 2 percent adjustment is made for low-risk projects. Which project(s) should PPP purchase?
2.The CFO of Lazy Loungers is evaluating the following independent, indivisible projects:
Project
Cost
IRR
A
$10,000
21.0%
B
15,000
20
C
25,000
16
Lazy's weighted average cost of capital (WACC) is 14 percent if the firm does not have to issue new common equity; if new common equity is needed, its WACC is 17 percent. Lazy's capital structure consists of 40 percent debt. If Lazy has no preferred stock and expects to generate $24,000 in retained earnings this year, which project(s) should be purchased?
1.Following are three independent projects Peanut/ Pecan Processing (PPP) is evaluating:
| Project | IRR | RISK |
| P | 10% | Low |
| Q | 12% | Average |
| R | 14.5% | High |
PPP generally considers risk when examining projects by adjusting its average required rate of return, r, which equals 11 percent. A 4 percent adjustment is made for high-risk projects, and a 2 percent adjustment is made for low-risk projects. Which project(s) should PPP purchase?
2.The CFO of Lazy Loungers is evaluating the following independent, indivisible projects:
| Project | Cost | IRR |
| A | $10,000 | 21.0% |
| B | 15,000 | 20 |
| C | 25,000 | 16 |
Lazy's weighted average cost of capital (WACC) is 14 percent if the firm does not have to issue new common equity; if new common equity is needed, its WACC is 17 percent. Lazy's capital structure consists of 40 percent debt. If Lazy has no preferred stock and expects to generate $24,000 in retained earnings this year, which project(s) should be purchased?
