THE INSTITUTE OF FINANCE MANAGEMENT
FACULTY OF ACCOUNTANCY, BANKING AND FINANCE
DEPARTMENT OF BANKING AND FINANCE
BACHELOR IN ACCOUNTANCY
ACADEMIC YEAR; 2021/2022
YEAR THREE
AFU 08608: PROJECT MANAGEMENT
BAC 3A : GROUP 2 (SUB_GROUP 5)
S/N
NAME
REGISTRATION NUMBER
1
NGONDE ALFRED KESERE
IMC/BAC/1912132.
2.
BATHROMEO JAMES
IMC/BAC/1912565
3.
IMC/BAC/19
4.
IMC/BAC/19
5.
IMC/BAC/19
6.
IMC/BAC/19
QUESTION 10.
Conglomerate Inc. consists of 2 divisions of equal size, and Conglomerate is 100 percent equity
financed. Division A’s cost of equity capital is 9.8 percent, while Division B’s cost of equity capital
is 14 percent. Conglomerate’s composite WACC is 11.9 percent. Assume that all Division A
projects have the same risk and that all Division B projects have the same risk. However, the
projects in Division A are not the same risk as those in Division B. Which of the following projects
should Conglomerate accept?
a. Division A project with an 11 percent return.
b. division B project with a 12 percent return.
c. Division B project with a 13 percent return.
d. Statements a and c are correct.
SOLUTION
 According to the scenario above, the correct answer is statement (a). this is due to the
following circumstances;
 Division A should accept only projects with a return greater than 9.8 percent not only that,
but also its project’s risks are not the same which may enable an investor to diversify the
project into sub-projects so as to reduce both certainty and uncertainty risks of suffering
losses. On the other hand Division B should accept only projects with a return greater than
14 percent.
 The higher the projected IRR on a project and the greater the amount it exceeds the cost of
capital the more net cash the project generates for the company. Meaning, in this case, the
project looks profitable and management should proceed with it. On the other hand, if the
IRR is lower than the cost of capital, the rule declares that the best course of action is to
forego the project or investment. Mathematically, IRR is the rate that would result in the net
present value (NPV) of future cash flows equaling exactly zero.
 Investors and firms use the IRR rule to evaluate projects in capital budgeting, but it may not
always be rigidly enforced. Generally, the higher the IRR, the better. However, a company
Conglomerate Inc. may prefer a project with a lower IRR because it has other intangible
benefits, such as contributing to a bigger strategic plan or impeding competition. A company
may also prefer a larger project with a lower IRR to a much smaller project with a higher
IRR because of the higher cash flows generated by the larger project. The company’s
composite WACC is irrelevant in the decision.
NOTE;
Cost of equity capital: is the funds required for a project may be raised by the issue of
equity shares which are of permanent nature. These funds need not be repayable during the lifetime
of the organization. Calculation of the cost of equity shares is complicated because, unlike debt
and preference shares, there is no fixed rate of interest or dividend payment. Cost of equity share
is calculated by considering the earnings of the company, market value of the shares, dividend per
share and the growth rate of dividend or earnings.
REFERENCE
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