Eyes of the World Corporation has traditionally employed a firm–wide discount rate for capital budgeting purposes.

However, its two divisions, publishing and entertainment, have different degrees of risk given by β_P = 1 and E = 1.5, where P is the beta for publishing and E the beta for entertainment. The beta for the overall firm is 1.3. The risk free rate is 5% and the expected return on the market is 15%. The firm is considering the following capital expenditures:

1. Which projects would it accept if it uses the opportunity cost of capital for the entire company?
2. Which projects would it accept if it estimates the cost of capital separately for each division?

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Publishing Entertainment Proposed Initial Project Investment IRR Proposed Initial Project Investment IRR P1 1M 0.13 E1 4M 0.16 P2 3M 0.121 E2 6M 0.17 P3 2M 0.09 E3 5M 0.14