Question

Wilson’s is reviewing a project with an internal rate of return of 13.09 percent and a beta of 1.42. The market risk premium is 8.1 percent, the tax rate is 35 percent, and the risk-free rate is 2.9 percent. The firm's WACC is 12.68 percent. Will the project be accepted if the WACC is used as the discount rate for the project? Should the project be accepted according to the CAPM, and why or why not?

Answer 1

Answer:

Accepted and rejected

Explanation:

Since the internal rate of return is 13.09% and the WACC is 12.68%

As we can see that the internal rate of return is higher than the WACC as WACC is considered as the discount rate

So the project should be accepted

And, if CAPM is used

So, the expected rate of return is

If CAPM is used

Risk-free rate of return + Beta × market risk premium

= 2.9% + 1.42 × 8.1%

= 2.9% + 11.502%

= 14.40%

And, The Internal rate of return  = 13.09%

Since the internal rate of return is less than the expected rate of return therefore the project should be rejected