Q. Capital asset pricing model to estimate a project?

CAPM could have been utilized to estimate a project - specific Ke if the project activities were different from that of the company. This could then have been used to compute a project specific WACC.

The process for this would have been as follows.

(i) Find a listed company with activities alike to those of the project.

(ii) Find its beta factor in a book of betas.

(iii) Regulate for gearing if necessary.

(iv) Put in to the CAPM equation.

Project Ke = rf + ß (rm - rf)

Note               

r_f could be calculated by looking at yields on government gilts.

r_m could be computed by looking at movements on the FT all shares index.

The model's strengths and weaknesses comprise the following.