Question

You are a consultant to a mid-sized manufacturing corporation that is considering an investment project. The project requires an initial investment of $100 million and will generate an after tax cash of $20 million in the first year and the cash flow will increase 5% thereafter every year (Please note that this is a constant growing cash flow).The project’s beta is 1.5. Assuming that rf=5% and E ( rM ) = 12%, Please answer the following questions.

What is the net present value of the project ?
What is the highest possible discount rate for the project before its NPV becomes negative ?
What is the highest possible beta estimate for the project before its NPV becomes negative ?

Answer 1