The correct opportunity cost for a project is determined to be 15% and the project is expected to generate $1 million in cash flows at the end of the next 4 years after an initial outlay of $3 million. Based on this information, the project would plot:
A) above the security market line.
B) below the security market line.
C) on the security market line.
D)on the security market line, with a beta of 1.0.

Question

Quizplus · Accepted Answer

NPV = -$3m + $1m{(1/.15) - [1/.15(1.15⁴)]} = -$145,021.64; Since the NPV is negative, the project will plot below the SML.

The Correct Opportunity Cost for a Project Is Determined to Be