What is the required rate of return for Project 1?

To determine the required rate of return for Project 1, it's essential to consider the concept of the required rate of return, which is the minimum return that investors expect to achieve from an investment, given its risk level. This rate often reflects the opportunity cost of capital and takes various factors into account, such as the risk-free rate and the risk premium associated with the specific project.

In many cases, the required rate of return is derived from a method such as the Capital Asset Pricing Model (CAPM), which considers the risk-free rate and the expected market return adjusted for the project's systematic risk, represented by its beta. A rate of 12% indicates a balanced trade-off between acceptable risk and the returns that an investor would look for, often based on market conditions and the specific risk profile of the project.

Outside of this range of assumption, other choices such as 10%, 8%, or 15% might not accurately reflect the risk-return equilibrium that investors seek. A lower rate like 8% could imply that the project is viewed as significantly less risky than it may be, leading to an underestimation of its required return. In contrast, a higher rate of 15% could suggest that the project carries higher risk than what has