Question
Compnay U has two separate divisions--Gamma and Delta. Gamma, the larger division, is responsible for 65% of the company's overall sales. It is also the
Compnay U has two separate divisions--Gamma and Delta. Gamma, the larger division, is responsible for 65% of the company's overall sales. It is also the riskier of the two divisions. When management is deciding which of the various divisional projects should be accepted, the managers should: Options:
allocate more funds to Gamma since it is the larger of the two divisions.
assign appropriate, but differing, discount rates to each division and then select the projects with the highest net present values.
allocate the company's funds to the projects with the highest net present values based on the company's weighted average cost of capital.
fund the highest net present value projects from each division based on an allocation of 65% of the funds to Gamma and 35% of the funds to Delta.
fund all of Delta's projects first since they tend to be less risky and then allocate the remaining funds to the Gamma projects that have the highest net present values.
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