A local management consulting firm is preparing a business report for the Government of Illinois. In particular, you have been hired by that firm to calculate the weighted average cost of capital (WACC) pertaining to three firms. None of those firms resort to perferred shares to raise external financing. The risk-free rate is 1.75%. More information is provided below. Firm 1 Firm 2. Firm 3 Equity (common stocks) Market Value $3,456,125 $4,123,850 $8,620,890 Beta coefficient 0.8 1.6 2.15 Expected Return (Market) 6.25% 6.25% 6.25% Debt Market Value $1,345,000 $2,145,890 $4,199,250 Before-Tax Cost of Debt 8.25% 7.50% 9.50% Tax Rate 21.35% 21.35% 21.35% 1a. In light of the information above, compute the three weighted average costs of capital (WACC).

Question 2 (50 points) Illinois Decision Making Experts (IDME) is a management consulting firm that proceeds with decision-making analysis via NPV. More information is provided below. Cash Flows and Discount Rate Project 1 Project 2 Project 3 Investment (t = 0) $5,142,580 $9,442,600 $13,562,090 Cash Flow (year 1) $1,431,450 $2,176,890 $7,456,250 Cash Flow (year 2) $1,856,740 $4,356,710 $3,756,660 Cash Flow (year 3) $1,658,980 $1,324,760 $1,678,450 Cash Flow (year 4) $845,670 $3,356,780 $3,415,700 Discount Rate (I) 4.65% 6.85% 9.35% 2a. In light of the information above, which of the three projects generates the most value? Please make your decision based on the NPV criterion.