The impact of a firm's cost of capital on managerial decisions

Consider the following case:

Lancashire Railway Company $($LRC$)$ has two divisions, $L$ and H$.$ Division $L$ is the company's low$-$risk division and would have a weighted average cost of capital of $8\%$ if it was operated as an independent company. Division $H$ is the company's high$-$risk division and would have a weighted average cost of capital of $14\%$ if it was operated as an independent company. Because the two divisions are the same size, the company has a composite weighted average cost of capital of $11\%.$ Division L is considering a project with an expected return of $9\mathrm{.}5\%.$

Should Lancashire Railway Company $($LRC$)$ accept or reject the project?

Reject the project

Accept the project

On what grounds do you base your accept$-$reject decision?

Division L$\text{'}$s project should be accepted, since its return is greater than the risk$-$based cost of capital for the division.

Division L$\text{'}$s project should be accepted, because its return is less than the risk$-$based cost of capital for the division.