Astra International is a manufacturer of automotive parts. When one of its machines malfunctions, the company sends out a repair technician; if he cannot repair it on the spot, he puts in a replacement machine so that the broken one can be taken to the firm’s repair facility in Surabaya, Indonesia. Anthony Ginting, a finance student and an intern in the company’s finance department, recently reviewed the firm’s capital structure and estimated that the firm’s weighted average cost of capital is approximately 13 percent. He hopes to determine which of several major capital expenditures the firm should make in the current year based on a comparison of the rates of return he estimated for each project (that is, the compound annual rate of return earned on the investment over its life) and the firm’s cost of capital. Specifically, the firm is considering the following projects (ranked by their internal rate of return):

If all five of the investments being considered by Astra International are of similar risk and that risk is very similar to that of the company as a whole, which project(s) should Anthony recommend the firm undertake? You may assume that the firm can raise all the capital it needs to fund its investments at the cost of capital of 13 percent. Explain your answer.

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PROJECT INVESTED ANNUAL RATE OF CAPITAL RETURN A $650,000 19% B 1,400,000 15% C 600,000 14% D 700,000 9% E 1,350,000 7%