A project has the following forecasted cash flows: Cash Flows, $ Thousands C0 C1

Question

A project has the following forecasted cash flows: Cash Flows, $ Thousands C0 C1 C2 C3 ?140 +80 +100 +90 The estimated project beta is 1.58. The market return rm is 16%, and the risk-free rate rf is 5%. Required: (a) Estimate the opportunity cost of capital and the project's PV (using the same rate to discount each cash flow). (Round your answers to 2 decimal places. Omit the "$" and "%" signs in your response.) Cost of capital % PV $ (b) What are the certainty-equivalent cash flows in each year? (Round your answers to 2 decimal places.) Year Certainty-equivalent cash flow 1 2 3 (c) What is the ratio of the certainty-equivalent cash flow to the expected cash flow in each year? (Round your answers to 4 decimal places.) Year Ratio 1 2 3

Explanation / Answer

(a) cost of capital= 5+1.58(16-5)= 22.38% PV= 80/1.2238+(100/1.2238^2)+(90/1.2238^3)= $181.243

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