You are a consultant to a firm evaluating an expansion of its current business.
ID: 2754504 • Letter: Y
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:
a. On the basis of the behavior of the firm’s stock, you believe that the beta of the firm is 1.7. Assuming that the rate of return available on risk-free investments is 5% and that the expected rate of return on the market portfolio is 12%, 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 = $___________
b. Should the project be accepted? Yes or No?
Years Cash Flow 0 -300 1-10 80Explanation / Answer
A.
Calculation of required return by using CAPM method :
ke = risk free interest rate +beta (market return- risk free rate)
= 5% + 1.7 (12% - 5%)
=16.9% or 17%
NPV = Present value of inflows - Present value of cash outflows
b. yes, project should be accepted as there is positive NPV 0F $ 73
Year cash flows pvf@ 17% Present value 0 -300 1 -300 1-10 80 4.66 373 NPV 73Related Questions
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