Project C has been classified into risk class II by the analyst of a major firm. The risk premium required for projects in this risk class is 8%. The current risk-free rate measured by the analyst is 10%. If the project has an estimated return of 20%, the analyst would recommend _____.
A) accepting project C
B) rejecting project C
C) re-estimating the risk premiums for class II projects
D) None of these are correct

Question

Quizplus · Accepted Answer

The estimated return of project C is 20%, which is higher than the current risk-free rate of 10%. Additionally, the risk premium of 8% required for projects in risk class II has already been applied. Therefore, the analyst would recommend accepting project C as it appears to have the potential to generate returns above the required rate of return.

Project C Has Been Classified into Risk Class II by the Analyst