A project is determined to have equal probability of generating $1 million annually or $500,000 annually for 4 years.The initial outlay is $2 million.The expected return on Treasury bills is 6% and the market risk premium is 10%.What is the highest project beta that will justify acceptance of the project?
A) 0.245
B) 1.000
C) 1.245
D) 2.310

Question

Quizplus · Accepted Answer

To justify acceptance, the project's expected return must equal or exceed the required return. The expected cash flow is $750,000 annually. Using the CAPM, the required return is 6% + beta * 10%. The NPV must be zero or positive, so solve for beta where NPV = 0. The highest beta that satisfies this is 1.245.

A Project Is Determined to Have Equal Probability of Generating