As a financial analyst, you are tasked with evaluating a capital budgeting proje

Question

As a financial analyst, you are tasked with evaluating a capital budgeting project. You were instructed to use the IRR method and you need to determine an appropriate hurdle rate. The risk-free rate is 4% and the expected market rate of return is 11%. Your company has a beta of 1.4 and the project that you are evaluating is considered to have risk equal to the average project that the company has accepted in the past. According to CAPM, the appropriate hurdle rate would be _________________________ ?

Explanation / Answer

As per CAPM, expected return for the company = risk free rate + beta *(market return - risk free rate) = 4% + 1.4*(11%-4%) = 4% + 1.4*7% = 13.8%

Thus the company should use 13.8% as hurdle rate

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