XYZ Industries has three projects under consideration. Project L is a lower-than-average-risk project, project A is an average-risk project, and project H is a higher-than-average-risk project. You have gathered the following information to determine if one or more of these projects has an acceptable rate of return for the firm.
• Sources of financing 50% debt and 50% equity
• Rd = 7.00% before taxes
• Tax Rate = 30%
• Average beta for XYZ Industries = 1.5
• Rm = 12.00%
• Rf = 3.75%
• Adjusted WACC = 10%
• Beta for project L = 0.80, for project A = 1.00, and for project H = 1.20
• IRRL = 9.00%, IRRA = 10.00%, and IRRH = 11.00%
Calculate the required rate of return for each project and determine which, if any, projects are acceptable to the firm.
