A Firm Is Considering Three Investment Projects, Which We Will

Multiple Choice

A firm is considering three investment projects, which we will refer to as A, B, and C. Each project has an initial cost of $10 million. Investment A offers an expected rate of return of 16 percent, B of 8 percent, and C of 12 percent. The firm's cost of capital is 6 percent if it borrows $10 million, 10 percent if it borrows $20 million, and 15 percent if it borrows $30 million. Which project(s) should the firm invest in?

A) Just A, because it offers the highest rate of return and is the only investment that has a rate of return higher than 15 percent
B) All three should be undertaken, because the rate of return on B is above 6 percent, on C is above 10 percent, and on A is above 15 percent
C) Only A and C should be undertaken because both have rates of return that are greater than 10 percent
D) None of the above is correct.