Question: Capital Asset Pricing Model

In parts (A), (B), and (C) below assume that the risk-free interest rate is 3 percent and the market risk premium is 7 percent.

1. Dorothy Inc. is considering a project that will generate after-tax annual cash flows of
   $600,000 for 6 years. The beta of the project is 1.0, and the investment cost for the project is
   $2,700,000. Should the firm undertake the project? Explain.
2. Wicked Witch of the West Inc. is considering a project that will generate after tax cash flows of $600,000 for 10 years. The beta of its project is 1.2, and the investment cost for the project is $3,400,000. Should the firm undertake the project?
3. Draw a graph of the SML and locate the projects (A) and (B) on the graph.

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