Question

As a financial analyst, you are tasked with evaluating a capital-budgeting project. You were instructed to use the IRR method, and you need to determine an appropriate hurdle rate. The risk-free rate is 4%, and the expected market rate of return is 11%. Your company has a beta of 1.0, and the project that you are evaluating is considered to have risk equal to the average project that the company has accepted in the past.
Required:
1. According to CAPM, the appropriate hurdle rate would be ___________.

Answer 1

Answer:

11%

Explanation:

The capital asset pricing model is used to calculate required rate of return for a certain project. The rate of return is calculated based on risk free rate and rate of return with the volatility. Hurdle rate is the minimum rate return required for a project. The CAPM, is used to calculate the appropriate hurdle rate for the project.

Hurdle rate = Rf + (Rm - Rf) * beta

Hurdle rate = 4% + (11% - 4%) * 1.0

Hurdle rate = 11%