problem: Klott Corporation has a weighted average cost of capital of 11% for projects of average risk. Projects of below average risk have a cost of capital of 9%, while projects of above average risk have a cost of capital equal to 13%. Projects A & B are mutually exclusive, whereas all other projects are independent. None of the projects will be repeated. The given table summarizes the cash flows, internal rate of return (IRR), & risk of each of the projects.
|
Year (t)
|
Project A
|
Project B
|
Project C
|
Project D
|
Project E
|
|
0
|
($200,000)
|
($100,000)
|
($100,000)
|
($100,000)
|
($100,000)
|
|
1
|
66,000
|
30,000
|
30,000
|
30,000
|
40,000
|
|
2
|
66,000
|
30,000
|
30,000
|
30,000
|
25,000
|
|
3
|
66,000
|
40,000
|
30,000
|
40,000
|
30,000
|
|
4
|
66,000
|
40,000
|
40,000
|
50,000
|
35,000
|
Determine which projects will the firm select for investment?