A firm’s financial planning department reports that a project’s proposed risk-adjusted return on capital (RAROC) is 13 percent, the risk-free rate is 3 percent, the market return is 11 percent and the firm’s equity beta is 1.3. Use adjusted risk-adjusted return on capital (ARAROC) to determine whether or not the project should be accepted. This firm should:
　　A. Accept the project because its expected ARAROC is higher than the market’s excess return.
　　B. Reject the project because its expected ARAROC is lower than the market’s excess return.
　　C. Accept the project because its expected ARAROC is lower than the market’s excess return.
　　D. Reject the project because its expected ARAROC is higher than the market’s excess return.
　　Answer: B
　　ARAROC = (0.13 - 0.03) / 1.3 = 0.0769 = 7.69%
　　The project should be rejected because the ARAROC of 7.69 percent is less than the excess return on the market: 11%-3% = 8%.
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