J Construction Corporation has an overall cost of capital of 11.5%. This cost of capital reflects cost of capital for a project with average risk. Like any company, the firm takes on projects with various degrees of risk. In the past, the company has considered low-risk projects to have a cost of capital of 9% and high-risk projects to have a cost of capital of 15%. Which of the following projects should the company select to maximize shareholder wealth.
Project Expected Return Risk
Single Family Homes 12% Low
Multifamily residential 11.5% Average
Commercial 17% High
Land Development 13.5% High
Condo Development 8.5% Low
How would this impact your decision if they were independent vs. mutually exclusive? Explain your answers.