A project under consideration has an internal rate of return of 15% and a beta o

Question

A project under consideration has an internal rate of return of 15% and a beta of 0.8. The risk-free rate is 5%, and the expected rate of return on the market portfolio is 15%. a. What is the required rate of return on the project? (Do not round Intermedlate calculations. Enter your answer as a whole percent.) b. Should the project be accepted? O Yes No c. What is the required rate of return on the project if its beta is 1.80? (Do not round intermediate calculations. Enter your answer as a whole percent.)

Explanation / Answer

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a) Calculation of reuired rate of return

Return of market=15%

Beta=0.8

Risk free rate=5%

Expected Return=Risk free Rate+Beta(Return of market-Risk free rate)= 5+0.8(15-5)=13%

Required rate of return=13%

b) Internal Rate of return=15%

   Required rate of return=13%

As the internal rate of return is more than the required rate of return that is cost of capital of project then project shall be accepted.

c) Calculation of required rate of return if beta is 1.8

Expected return= 5+1.8(15-5)=23%( Refering the above formula)

Therefore required rate of return is 23%

d) Internal rate of return=15%

Required rate of return=23%

As internal rate of return is less than the required reate of return then the project should not be accepted.

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