A firm has an asset beta of 1 and a company cost of capital of 15%. A new projec

Question

A firm has an asset beta of 1 and a company cost of capital of 15%. A new project comes along with a beta of 2 and an expected return (IRR) of 23%. Putting the project’s beta into the CAPM gives the project a return of 25% based on project risk. The firm should

A) Reject the project because the IRR is greater than the company cost of capital.

B) Reject the project because the CAPM return is greater than the IRR.
C) Accept the project because the IRR is greater than the company cost of capital.  
D) Accept the project because the CAPM return is greater than the IRR.

Explanation / Answer

Answer is D project should be accepted as the CAPM return is more than the return on IRR basis.

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