Question

a project under consideration has an internal rate of return of 15% and a beta of 0.9. the risk-free rate is 5%, and the expected rate of return on the market portfolio is 15%. what is the required rate of return on the project? note: do not round intermediate calculations. enter your answer as a whole percent. should the project be accepted? what is the required rate of return on the project if its beta is 1.90? note: do not round intermediate calculations. enter your answer as a whole percent. if project's beta is 1.90, should the project be accepted?

Answer 1

The required rate of return for the project with a beta of 0.9 is 14%, and since the IRR is 15%, the project should be accepted. If the beta changes to 1.90, the required rate becomes 24%, making the project unacceptable as its IRR is only 15%.

Step-by-step explanation:

The student is asking how to calculate the required rate of return for a project using the Capital Asset Pricing Model (CAPM). The formula for the required rate of return in CAPM is Risk-Free Rate + Beta*(Expected Rate of Return on the Market Portfolio - Risk-Free Rate). With a beta of 0.9, the required rate of return is calculated as 5% + 0.9*(15% - 5%) = 14%. Therefore, the project with an IRR of 15% exceeds the required rate of return of 14% and should be accepted.

If the beta of the project is 1.90, the new required rate of return is 5% + 1.90*(15% - 5%) = 24%. In this case, since the IRR of the project is only 15%, which is less than the required rate of return of 24%, the project should not be accepted.