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 H is considering a project with an expected return of 12%. Should Lancashire Railway Company (LRC) accept or reject the project?

Lancashire Railway Company (LRC)

Lancashire Railway Company (LRC) should reject the project.  The basis for rejecting Division H's project is that its return (12%) is less than the risk-based cost of capital for the division (14%).

Explanation:

a) Data:

Division L's weighted-average cost of capital = 8%

Division H's weighted-average cost of capital = 14%

Weight of Division L = 50%

Weight of Division H = 50%

Company composite weighted average cost of capital = 11% (8% * 50%) + (14% * 50%)

Expected return from a proposed project for Division H = 12%

the correct answer is economics is a game without winners or losers.

unlike sports or games economic is a game without losers or winner rather it is a game where everyone wins. parties of business doing businesses exchange money with each other and hence exchange is done on the basis of goods. one party takes the goods and other sales it so there is winner on both sides. each party values more highly the good it gets than the good it gives up. both sides exchange only because both intend to increase their value. so there is no concept of lose or win.