PepperMint Inc. is considering a project that will last three years. The increme

Question

PepperMint Inc. is considering a project that will last three years. The incremental free cashflows (FCFs) for the project for year 1, year 2, and year 3 are $20 million, $60 million, and $40 million, respectively. The project also requires a capital expenditure of $40 million immediately (at year 0). The project has a similar risk level as most other projects for the company and the market beta for the project is estimated to be 0.9. Research done by the CFO also suggests that the risk-free rate is 4% and the expected return on the market index is 12%.

The NPV of this project is closest to:

$55.60 million

$56.33

$49.39

$54.16 million

$63.34

$55.60 million

$56.33

$49.39

$54.16 million

$63.34

Explanation / Answer

The NPV of this project is closest to $55.60 million Statement showing Cash flows Particulars Time PVf@11.2% Amount PV Cash Outflows                       -                        1.00                 (40,000,000.00)                 (40,000,000.00) PV of Cash outflows = PVCO                 (40,000,000.00) Cash inflows                   1.00                 0.8993                   20,000,000.00                   17,985,611.51 Cash inflows                   2.00                 0.8087                   60,000,000.00                   48,522,333.21 Cash inflows                   3.00                 0.7273                   40,000,000.00                   29,090,127.83 PV of Cash Inflows =PVCI                   95,598,072.55 NPV= PVCI - PVCO                   55,598,072.55 ke= Rf +Beta (Rm-Rf) ke = 4% + .9(12%-4%) ke = 4% + 7.2% ke= 11.2%

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