Čash Flows -69 Risk Free Rate 4.0% 11 Beta of company's stock Risk Premium on average stock 2.3 14 5.5% 10 13 16 15 15 11 16 15 10 35 Using the IRR approach to capital budgeting, should the firm adopt this project? Hint: you will need to apply the CAPM to estimate the firm's cost of equity capital. Please compare the IRR to the cost of capital:
Čash Flows -69 Risk Free Rate 4.0% 11 Beta of company's stock Risk Premium on average stock 2.3 14 5.5% 10 13 16 15 15 11 16 15 10 35 Using the IRR approach to capital budgeting, should the firm adopt this project? Hint: you will need to apply the CAPM to estimate the firm's cost of equity capital. Please compare the IRR to the cost of capital:
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Cash Flows
-69
Risk Free Rate
4.0%
Beta of company's stock
Risk Premium on average
11
2.3
14
stock
5.5%
10
13
16
15
15
11
16
15
10
35
Using the IRR approach to capital budgeting, should
the firm adopt this project?
Hint: you will need to apply the CAPM to estimate the
firm's cost of equity capital.
Please compare the IRR to the cost of capital:
IRR
Cost of Capital (Required Return)
Difference (IRR - Cost of Capital)
#1 What is that difference?
A Between -10.0% and -4.0%
B Between -4.0% and 0.0%
C Between 0.0% and 4.0%
D Between 4.0% and 10.0%
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Expert Solution
Step 1
IRR is the annual rate of growth which a project is expected to generate. It is that rate of discount which makes the NPV of the project "zero". IRR is calculated using the same concept of NPV, the only difference being here we try to find the rate which will make the NPV "zero". The decision of accepting the project relies on the WACC(weighted average cost of capital) or (RRR)required rate of return of investor if the IRR is higher than the RRR then the project is expected to be profitable and it should be accepted.
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