RAROC is a profitability measure for analyzing risk-adjusted financial performance. For acceptance, a project must earn a return that's higher than the firm's hurdle rate - a benchmark rate of return set taking into account the firm's cost of both common and preferred equity. However, exclusively accepting only the projects whose RAROC > hurdle rate can result in a portfolio of high-risk projects that could ultimately result in losses and reduce the value of the firm. What's more lower return projects that have a RAROC < hurdle rate (rejected projects) also come with low risk that could provide steady returns and increase the value of the firm.

For these reasons, we adjust RAROC for systematic risk, giving rise to ARAROC, where:

Adjusted RAROC = $\text{RAROC} - \beta_e(R_m - R_f)$

Where: $R_m$ = expected return on the market $R_f$ = risk-free rate $\beta_e$ = firm's equity beta

$= 0.12 - 1.25(0.10 - 0.04) = 0.045$

The project can be accepted if ARAROC > risk-free rate. Since 4.5% > 4%, this particular projected can be accepted.