Question

A corporate project under consideration has an IRR of 15% and a Beta of 0.5. The

      risk-free rate is 6% (T-Bill Rate). The expected rate of return for the market

      portfolio is 17%. Should the project be accepted? Should it be accepted if now the

      Beta is 1.5? Why does your answer change? (Show ALL calculations).

Answer 1

Expected rate of return on project = risk free rate + beta * (expected rate of return for the market portfolio - risk free rate)

= 6% + .5 * (17% - 6%)

= 6% + .5 * 11%

= 6% + 5.5%

= 11.5%

Since the expected rate of reutn on the project is less than IRR we should not accpet the project.

Expected rate of when beta is 1.5 = risk free rate + beta * (expected rate of return for the market portfolio - risk free rate)

= 6% + 1.5 * (17% - 6%)

= 6% + 1.5 * 11%

= 22.5%

Once the beta increased to 1.5 then we should accpet the project.

We should accpet the project because the expected return on the project is higher than the IRR.