Assume that BF, Inc., an all-equity firm, has a firmwide WACC of 10 percent and that the firm is broken into three divisions: Textiles, Accessories, and Miscellaneous. The average Textiles project has a beta of 0.7, the average Accessories project has a beta of 1.3, and the average Miscellaneous project has a beta of 1.1.

The firm is currently considering the projects shown in the table below. The current approach is to use the firm’s WACC to evaluate all projects, but management sees the wisdom in adopting a subjective divisional cost of capital approach. Firm management is thus considering a divisional cost of capital scheme in which it will use the firm’s WACC for Miscellaneous projects, the firm’s WACC minus 1 percent for Textiles projects, and the firm’s WACC plus 3 percent for Accessories projects. The current expected return to the market is 12 percent, and the current risk-free rate is 5.75 percent.

For this group of projects, how much better would its accept/reject decisions be if it used this approach rather than if it continued to use the firm’s WACC to evaluate all projects? Would switching to an objective divisional cost of capital approach, where the WACC for each division is based on that division’s average beta, improve its accept/reject criteria any further?