You are a consultant to a large manufacturing corporation considering a project

Question

You are a consultant to a large manufacturing corporation considering a project with the following net after-tax cash flows (in millions of dollars): After-Tax CF -36 12 24. Years from Now 1-9 10 The project's beta is 1.5. Assuming rf-4% and E( = 12% a. What is the net present value of the project? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) Net present value b. What is the highest possible beta estimate for the project before its NPV becomes negative? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Highest possible beta value million

Explanation / Answer

a.

required return = 4 + 1.5*8 = 16%

NPV = 24.72

b. IRR = 31.9105

highest beta = (31.9105-4)/8 = 3.49

16.00% Cash flows Year Discounted CF                  (36.00) 0 -36.00                     12.00 1 10.34                     12.00 2 8.92                     12.00 3 7.69                     12.00 4 6.63                     12.00 5 5.71                     12.00 6 4.93                     12.00 7 4.25                     12.00 8 3.66                     12.00 9 3.16                     24.00 10 5.44

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