Snow Party Inc., a company that makes skis, snowboards, and winter clothing, has an optimal (and current) capital structure that consists of 45% debt and 55% equity. Snow Party is evaluating a project with which they would expand into snowmobile manufacturing. The expansion will require a $10 million investment and is expected to generate an annual net cash flow of $2 million over its 10-year economic life. Snow Partys beta is 1.25, its cost of debt is expected to be 6%, and its income is taxed at a 40% rate. If Snow Party decides to produce the snowmobiles, it will finance the project with 45% debt and 55% equity. The two companies that currently produce snowmobiles have an average beta of 1.35, an average capital structure that consists of 40% debt and 60% equity, and a 40% marginal tax rate. Based on the IRR decision criteria, if the risk free rate is 7% and the market risk premium is 9%, should Snow Party produce snowmobiles?

Question options:

a) Yes, the IRR of 16.40% is greater than the WACC of 12.6%

b) Yes, the IRR of 15.1% is greater than the WACC of 11.7%

c) Yes, the IRR of 16.4% is greater than the WACC of 11.7%

d) Yes, the IRR of 15.1% is greater than the WACC of 12.6%