Midwest Water Works estimates that its WACC is 10.5%.

The company is considering the following

capital budgeting projects. Heres' a table:

Project Size Rate of return

A $1million 12.0%
B 2 million 11.5
C 2 million 11.2
D 2 million 11.0
E 1 million 10.7
F 1 million 10.3
G 1million 10.2

Assume that each of these projects is just as risky as the firm's existing assets and that the firm may accept
all the projects or only some of them. Which set of projects should be accepted? Explain

Solution:

The Midwest Water Works should accept those projects which have Rate of Return greater than WACC
(10.5%) because only the project whose return is greater than WACC will have a positive NPV and would
increase the value of the firm.

So Midwest Water Works should accept project A, B, C, D and E.