Epsilon Corp. is evaluating an expansion of its business. The cash-flow forecast
ID: 2797961 • Letter: E
Question
Epsilon Corp. is evaluating an expansion of its business. The cash-flow forecasts for the project are as follows:
The firm's existing assets have a beta of 2.4. The risk-free interest rate is 6% and the expected return on the market portfolio is 12%. What is the project's NPV? (Enter your answer in millions. A negative answer should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)
Please list all formulas to solve for solutions.
Years Cash Flow($ millions) 0 200 1-9 48
Explanation / Answer
Required Rate of Return using the Capital Asset Pricing Model:
= Risk Free Rate + ( expected return on the market portfolio - Risk Free Rate) * Beta
= 6% + ( 12% -6% ) *2.4
= 20.40%
NPV of Project = Present Value of Cash Inflow - Present Value of cash Outflow
= $ 48 Million * 1/(1.204)^1 + $ 48 Million * 1/(1.204)^2 + $ 48 Million * 1/(1.204)^3+... + $ 48 Million * 1/(1.204)^9 - $ 200 Million
= $ 191.04 - $ 200
= - $ 8.96
Hence the correct answer is - $ 8.96
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