Question

if the risk of an investment project has a beta of 1: a- projects initial cost...

if the risk of an investment project has a beta of 1:

a- projects initial cost should be increased/ decreased to account for the increase/ decrease in risk.

b- projects discount rate must not be adjusted based on the risks of the projects cash flows.

c- projects discount rate must be adjusted based on the sources of project financing.

d- average rate used for all prior projects should be used as the new projects discount rate.

e- market rate of return should be used as the projects discount rate.

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

when the risk of an investment project has a beta of 1, it will mean that the risk of the investment project will be similar to that of the market, and the market rate of return can be used as the discounting rate in order to find out the the value of cash flows of the project

When there is a beta of 1 related to an investment project risk, it will mean that the discount rate will be similar to that of the market as it will fluctuate in similar proportion to the market rate of return, so it can be said that the market rate of return can be used as a Project discount rate.

All the other options are not true because they are adjusting the product discount rate.

Correct answer would be option (e)market rate of return should be used as project discount rate.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
​(​Risk-adjusted discount rates and risk classes​) The G. Wolfe Corporation is examining two​ capital-budgeting projects with​...
​(​Risk-adjusted discount rates and risk classes​) The G. Wolfe Corporation is examining two​ capital-budgeting projects with​ 5-year lives. The​ first, project​ A, is a replacement​ project; the​ second, project​ B, is a project unrelated to current operations. The G. Wolfe Corporation uses the​ risk-adjusted discount rate method and groups projects according to​ purpose, and then it uses a required rate of return or discount rate that has been preassigned to that purpose or risk class. The expected cash flows for...
A firm needs to decide between two mutually exclusive projects. Project Alpha requires an initial investment...
A firm needs to decide between two mutually exclusive projects. Project Alpha requires an initial investment of $37,000 today and is expected to generate cash flows of $31,000 for the next 4 years. Project Beta requires an initial investment of $92,000 and is expected to generate cash flows of $36,400 for the next 8 years. The cost of capital is 10%. The projects can be repeated with no change in cash flows. What is the NPV of the project that...
A firm needs to decide between two mutually exclusive projects. Project Alpha requires an initial investment...
A firm needs to decide between two mutually exclusive projects. Project Alpha requires an initial investment of 50,000 today and is expected to generate cash flows of 51,000 for the next 3 years. Project Beta requires an intial investment of 85,000 and is expected to generate cash flows of 49,700 for the next 6 years. The cost of capital is 6%. The projects can be repeated with no charge in cash flows. What is the NPV of the project that...
You are considering Project B that requires an initial investment of $70. The current present value...
You are considering Project B that requires an initial investment of $70. The current present value of its cash flows is estimated to be $100 based on today’s market conditions. You can undertake Project B now or wait for one month to decide. The current risk-free rate is 0.25%, and the standard deviation of project return is 10%. What should you do? Suppose instead that the initial investment for Project B is $100, the current present value of its cash...
The Walk-Up Window is considering two mutually exclusive projects. Project A has an initial cost of...
The Walk-Up Window is considering two mutually exclusive projects. Project A has an initial cost of $64,230 and annual cash flows of $25,200 for three years. Project B has an initial cost of $45,400 and annual cash flows of $21,400, $21,900, and $10,200 for Years 1 to 3, respectively. What is the incremental IRRA–B? Which project should be accepted if the discount rate is 9 percent? Which project should be accepted if the discount rate is 6 percent?
A capital investment project requires an initial investment of $100 and generates positive cash flows, $50...
A capital investment project requires an initial investment of $100 and generates positive cash flows, $50 and $100, at the end of the first and second years, respectively. (There is no cash flow after the second year) The firm uses a hurdle rate of 15% for projects of similar risk. Determine whether you should accept or reject the project based on NPV. Determine whether you should accept or reject the project based on IRR. Determine whether you should accept or...
Catherine Middleton has assessed the following information relevant to an investment analysis of Eggplant Produce Trading...
Catherine Middleton has assessed the following information relevant to an investment analysis of Eggplant Produce Trading shares: Risk-adjusted required rate of return for Eggplant Produce Trading shares = 16.6% Rate of return on treasury bonds = 4% Expected return on the market portfolio = 10% Forecast investment return for Eggplant Produce Trading shares = 19% Required: (1) What is the beta of Eggplant Produce Trading shares? (2) Based on your prior discussion, should Catherine be deciding to; hold, buy or...
1.Joe Jones, Inc. has a beta of .85. The risk-free rate is 5% and the expected...
1.Joe Jones, Inc. has a beta of .85. The risk-free rate is 5% and the expected rate of return on the market portfolio is 10%. a. Compute the required return for Joe Jones using the security market line (SML) equation. b. What is "beta?" Under what rationale is beta an appropriate measure of risk. 2. A firm's return on assets (ROA) decreased during a year in which its net profit margin and its return on equity (ROE) increased. Explain what...
The G. Wolfe Corporation is examining two? capital-budgeting projects with? 5-year lives. The? first, project? A,...
The G. Wolfe Corporation is examining two? capital-budgeting projects with? 5-year lives. The? first, project? A, is a replacement? project; the? second, project? B, is a project unrelated to current operations. The G. Wolfe Corporation uses the? risk-adjusted discount rate method and groups projects according to? purpose, and then it uses a required rate of return or discount rate that has been preassigned to that purpose or risk class. The expected cash flows for these projects are given in the...
Grey company is analyzing a project that requires an initial investment of $600,000. The project's expected...
Grey company is analyzing a project that requires an initial investment of $600,000. The project's expected cash flows are: (Year 1) $350,000, (Year 2) -$125,000, (Year 3) $500,000 and (Year 4) $400,000. 1. Grey company's WACC is 10%, and the project has the same risk as the firm's average project. Calculate this project's modified internal rate of return (MIRR): _______%. 2. If Grey company's managers select projects based on the MIRR criterion, they should accept or reject this independent project....
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT