Preston Industries has two separate divisions. Each division is in a separate line of business. Division A is the largest division and represents 65 percent of the company's overall sales. Division A is also the riskier of the two divisions. When management is deciding which of the various divisional projects should be accepted, the managers should:
A) allocate more funds to Division A since it is the larger of the two divisions.
B) fund all of Division B's projects first since they tend to be less risky and then allocate the remaining funds to the Division A projects that have the highest net present values.
C) allocate the company's funds to the projects with the highest net present values based on the company's weighted average cost of capital.
D) assign appropriate, but differing, discount rates to each project and then select the projects with the highest net present values.
E) fund the highest net present value projects from each division based on an allocation of 65 percent of the funds to Division A and 35 percent of the funds to Division B.

Question

Quizplus · Accepted Answer

Assigning appropriate, but differing, discount rates to each project allows for an accurate assessment of the projects' net present values (NPVs) by accounting for the varying levels of risk associated with each division. This method ensures that the company invests in projects that offer the best returns relative to their risk.

Preston Industries Has Two Separate Divisions