Compute the PI Statistic for Project X and Note Whether

question 98

Multiple Choice

Compute the PI statistic for Project X and note whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent.

• A)-0.0977 percent, reject
• B)-9.77 percent, reject
• C)-24.41 percent, reject
• D)24.41 percent, accept

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Definitions:

Market Risk Premium

The additional return an investor expects to receive from holding a risky market portfolio instead of risk-free assets.

SML

Stands for Security Market Line, a graphical representation of the expected return of investments at different levels of systematic, or market, risk.

Beta

An indicator of how much a stock's price is expected to fluctuate, compared to fluctuations in the overall stock market.

Required Rate of Return

The minimum annual percentage return an investor expects to earn from an investment to consider it worthwhile.