Question

The Treasury bill rate is 3% and the market risk premium is 7%.

Project	Beta	Internal Rate of Return, %
P	0.65	7
Q	0	10
R	1.00	12
S	0.05	11
T	0.60	14

a.	What are the project costs of capital for new ventures with betas of .40 and 1.78? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Beta	Cost of Capital
0.40	%
1.78	%

b.	Which of the following capital investments have positive NPVs? (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.)
	Q R P S T

Answer 1

Project	Beta	Internal Rate of Return, %	Cost of Capital = Risk free rate + beta*Market risk premium
P	0.65	7	7.55	%
Q	0	10	3	%
R	1	12	10	%
S	0.05	11	3.35	%
T	0.6	14	7.2	%
The projects whose IRR is greater than cost of capital will produce positive NPV
i.e. Projects Q,R,S and T