Assume a world in which the assumptions of the capital asset pricing model (CAPM) hold. A company
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Question:
Assume a world in which the assumptions of the capital asset pricing model (CAPM) hold. A company can invest in a project which costs today $5,000, in one year delivers $2,000 with certainty and in two years delivers -$1,000 with a probability of 25% and $8,000 with a probability of 75%. Suppose the annual risk free rate is 3%, the expected return on the market is 10% and the project's market beta is 1.5.
Should the company invest in the project or not? Explain why or why not.
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