A project under consideration has an internal rate of return of 13% and a beta of 0

Finance Jan 08, 2021

A project under consideration has an internal rate of return of 13% and a beta of 0.6. The risk-free rate is 5% and the expected rate of return on the market portfolio is 11%. a. Should the project be accepted?

b. Should the project be accepted if its beta is 1.8?

Expert Solution

Required return = Riskfree rate + [Beta x (Expected market return - Riskfree rate)]

a) ACCEPT

Required return = 5% + [0.6 x (11% - 5%)] = 5% + 3.6% = 8.6%

Since, IRR (13%) is greater than required return, project should be accepted.

b) REJECT

Required return = 5% + [1.8 x (11% - 5%)] = 5% + 10.8% = 15.8%

Since, IRR (13%) is less than required return, project should not be accepted..

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