A project under consideration has an internal rate of return of 16% and a beta o

Question

A project under consideration has an internal rate of return of 16% and a beta of 0.8. The risk-free rate is 6%, and the expected rate of return on the market portfolio is 16%.

Calculate the required return = ____ %

Should the project be accepted, yes or no?

Calculate the required return if its beta is 1.8
Required return = _______ %

Should this project be accepted, yes or no?

A project under consideration has an internal rate of return of 16% and a beta of 0.8. The risk-free rate is 6%, and the expected rate of return on the market portfolio is 16%.

Calculate the required return = ____ %

Should the project be accepted, yes or no?

Calculate the required return if its beta is 1.8
Required return = _______ %

Should this project be accepted, yes or no?

Explanation / Answer

Required return = 6% + 0.8 * (16% - 6%)

= 14%

Yes, since IRR is higher than required return, the project should be accepted.

Required return = 6% + 1.8 * (16% - 6%)

= 24%

No, since IRR is lower than required return, the project should not be accepted.

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