Project C has been classified into risk class II by the analyst of a major firm.The risk premium required for projects in this risk class is 8%.The current risk-free rate measured by the analyst is 10%.If the project has an estimated return of 20%, the analyst would recommend
A)accepting project C
B)rejecting project C
C)re-estimating the risk premiums for class II projects
D)none of these

Question

Quizplus · Accepted Answer

The estimated return of project C (20%) is higher than the required rate of return adjusted for risk premium (18% = 10% + 8%). This suggests that the project is expected to generate a return that exceeds the minimum rate of return required by investors given the level of risk involved. Therefore, the analyst would recommend accepting project C. Re-estimating the risk premiums for class II projects or rejecting the project are not necessary based on the provided information.

Project C Has Been Classified into Risk Class II by the Analyst