A packaging materials producer is evaluating a potential project that has a forecasted risk-adjusted return on capital (RAROC) of 15%. Given that the risk-free interest rate stands at 3% per annum, the expected market return is 11% per annum, and the company's equity beta is 1.8, the producer uses the modified RAROC metric to decide whether to proceed with the project.

Exam-Like

Reject the project because the adjusted RAROC is higher than the market expected excess return.

12.5%

Accept the project because the adjusted RAROC is higher than the market expected excess return.

18.8%

Reject the project because the adjusted RAROC is lower than the risk-free interest rate.

62.5%

Accept the project because the adjusted RAROC is lower than the risk-free interest rate.

6.3%

Financial Risk Manager Part 2