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An all-equity firm is considering the following projects: The T-bill rate is 3.5 percent, and the expected

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An all-equity firm is considering the following projects:

Project Beta IRR W .85 10.4% .95 10.6 Y 1.20 11.9 1.35 14.1

The T-bill rate is 3.5 percent, and the expected return on the market is 11 percent.

a. Which projects have a higher expected return than the firm’s 11 percent cost of capital?

b. Which projects should be accepted?

c. Which projects would be incorrectly accepted or rejected if the firm’s overall cost of capital was used as a hurdle rate?

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Project Beta IRR W .85 10.4% .95 10.6 Y 1.20 11.9 1.35 14.1

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a Projects Y and Z b Using the CAPM to consider the projects we ...View the full answer


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The internal rate of return, or IRR, is a metric used to measure the profitability of an investment. It is the discount rate that makes the net present value of an investment equal to zero. To calculate the IRR, we need to know the investment\'s cash flows. These are the inflows and outflows of cash that will result from the investment. For example, an investment in a property might have cash outflows for the purchase price, closing costs, and any renovations, and cash inflows from rent and eventual sale of the property. The IRR is the discount rate at which the NPV of the investment is equal to zero. There are many ways to calculate IRR, from simple spreadsheet functions to more complex financial modeling software. It\'s worth noting that IRR can be a bit tricky when it comes to projects that don\'t have a consistent cash flow over time. These types of investments are known as \"irregular cash flow\" and the IRR might be misleading or not suitable to calculate. There are other metrics to evaluate these investments such as Modified Internal Rate of Return (MIRR) which is a variation of IRR and is used to get more accurate results.

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