Reference no: EM132421169

Problem: Assume Hildon Company's WACC is 12%. It increases its WACC by 3% for high risk projects and decreases by 2% for low risk projects. Assume further that it is considering the following independent project.

Project                    Risk              Required Capital $                  IRR %

X                            High               200,000                                  14

Y                            Average         150,000                                  11

Z                            Average         250,000                                  13

W                          Low                180,000                                   11

V                           Low                 120,000                                  9

Required:

1. Which of these projects should be accepted and what is the capital budget?
2. If Hildon uses its average WACC without adjustment for project risk, which project(s) would be erroneously accepted? And which project(s) would be erroneously rejected?