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) reestimating the risk premiums for class II projects
D) none of the above

Question

Quizplus · Accepted Answer

The estimated return for project C is 20%, which is higher than the current risk-free rate of 10%. In addition, the risk premium required for class II projects is 8%. Therefore, the project has a risk-adjusted return of 18% (20% - 8%). As the risk-adjusted return is higher than the risk-free rate, the project is worth accepting. Hence, the analyst would recommend accepting project C.

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