Question

The Treasury bill rate is 5% and the market risk premium is 8%.

Project	Beta	Internal Rate of Return, %
P	1.00	16
Q	0	8
R	2.00	22
S	0.40	9
T	1.90	20

a.	What are the project costs of capital for new ventures with betas of .75 and 1.55? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Beta	Cost of Capital
0.75	%
1.55	%

b.	Which of the following capital investments have positive NPVs? (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.)
	Pchecked Qunanswered Tunanswered Runanswered Sunanswered

Answer 1

Cost of Capital = Risk free rate + beta*market risk premium
Project	Beta	Internal Rate of Return, %	Cost of capital
P	1	16	13	%
Q	0	8	5	%
R	2	22	21	%
S	0.4	9	8.2	%
T	1.9	20	20.2	%
Cost of capital for new ventures
Beta 0.75 = 5+0.75*8 = 11%
Beta 1.55 = 5+ 1.55*8 = 17.4%
NPV will positive for those projects whose IRR is higher than cost of capital
i.e. Projects P,Q,R and S