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 C -32 15 30 Years from Now 1-9 10 The project's beta is 1.6. Assuming rf-6% and E(Tx) = 16% 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 calculation of the net present value cost of capital risk free rate + beta ( market return - risk free rate ) 6 % + 1.60 ( 16 - 6 ) 6 + 16 22% 1 years 1 2 3 4 5 6 7 8 9 10 2 cash flows 15 15 15 15 15 15 15 15 15 30 3 PVRF at 22 % 0.8197 0.6719 0.5507 0.4514 0.3700 0.3033 0.2486 0.2038 0.1670 0.1369 4 present value cash flows ( 2 * 3 ) 12.30 10.08 8.26 6.77 5.55 4.55 3.73 3.06 2.51 4.11 5 total present value cash flows 60.90 6 initial outlay 32 7 net present value ( 5 - 6 ) 28.90 b calculation of the highest possible beta highest possible beta shall be calculated considering the internal rate of return of the project 1 years 0 1 2 3 4 5 6 7 8 9 10 2 cash flows -32 15 15 15 15 15 15 15 15 15 30 internal rate of return using excel .=irr( cash flows form year 0 to 10 ) 46.32% highest beta ( internal rate of return - risk free rate ) / ( market rate of return - risk free rate ) ( 46.32 - 6 ) / ( 16 - 6 ) 4.03

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