You are a consultant to a firm evaluating an expansion of its current business.

Question

You are a consultant to a firm evaluating an expansion of its current business. The cash-flow forecasts (in millions of dollars) for the project are as follows: Years Cash Flow 0 -140 1-10 +25 On the basis of the behavior of the firm's stock, you believe that the beta of the firm is 1.5. Assuming that the rate of return available on risk-free investments is 6% and that the expected rate of return on the market portfolio is 13%, what is the net present value of the project? (Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places.) NPV $ Should the project be accepted?

Explanation / Answer

Hi, Ke = 6% + 1.5*(13 - 6) = 10.56% NPV = -140 + 25/(1+.1056)^1 + 25/(1+.1056)^2 + 25/(1+.1056)^3 + 25/(1+.1056)^4 + 25/(1+.1056)^5 + 25/(1+.1056)^6 + 25/(1+.1056)^7 + 25/(1+.1056)^8 + 25/(1+.1056)^9 + 25/(1+.1056)^10 = 9.99 or 10 is the NPV. Part B: Project should be accepted because NPV is +. Thanks, Aman

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