Question
Integrated Oil & Gas (IOG) is considering three projects P1, P2, and P3. The budgeting manager, Ashley, estimates the betas of these projects and their
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Integrated Oil & Gas (IOG) is considering three projects P1, P2, and P3. The budgeting manager, Ashley,
estimates the betas of these projects and their IRRs (Internal Rates of Return) as follows:
Ashley forecasts the expected return on the market is 15% and the expected risk-free rate is 6%. Ashley determines IOGs WACC to be 14%.
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a) If Ashley ignores risk and uses the IRR as basis for acceptance or rejection, which projects would be accepted? (3 marks)
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b) Considering risk, which projects should be accepted and which should be rejected? Explain why. (6 marks)
Integrated Oil & Gas (IOG) is considering three projects P1, P2, and P3. The budgeting manager, Ashley,
estimates the betas of these projects and their IRRs (Internal Rates of Return) as follows:
Ashley forecasts the expected return on the market is 15% and the expected risk-free rate is 6%. Ashley determines IOGs WACC to be 14%.
-
a) If Ashley ignores risk and uses the IRR as basis for acceptance or rejection, which projects would be accepted? (3 marks)
-
b) Considering risk, which projects should be accepted and which should be rejected? Explain why. (6 marks)
| Project | P1 | P2 | P3 |
| Beta | 1.60 | 1.10 | 0.68 |
| IRR | 18% | 16% | 13% |
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