Question
1.A company is contemplating 3 investment projects, called A, B, and C hereafter. All projects have an initial cost of $10 million. The expected rate
1.A company is contemplating 3 investment projects, called A, B, and C hereafter. All projects have an initial cost of $10 million. The expected rate of return of A is 16%, of B is 8%, and of C is 12%. The firm's cost of capital will be 6%, if the firm borrows $10 million, 10% if it borrows $20 million, and 15% if it borrows $30 million. Which project(s) should the firm invest in?
a.
Only A and C should be undertaken since both have rates of return that are greater than 10%.
b.
None of the answers is correct.
c.
All 3 should be undertaken, because the rate of return on B is above 6%, on C is above 10%, and on A is above 15%.
d.
Just A, since it offers the highest rate of return and is the only investment that has a rate of return higher than 15%
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