Question
In: Finance
You are a consultant to a firm evaluating an expansion of its current business. The cash-flow...
You are a consultant to a firm evaluating an expansion of its current business. The cash-flow forecasts (in millions of dollars) for the project are as follows. Year 0: initial outlay of 120, Years 1 to 10: 16 each year.
On the basis of the behavior of the firm’s stock, you believe that the beta of the firm is 1.5. Assuming that the rate of return available on risk-free investment is 4% and that the expected rate of return on the market portfolio is 12%, what is the (risk-adjusted) net present value of the project? Please show your work.
Solutions
Expert Solution
NPV = PV of cash Inflows - PV of Cash Outflows
Required Ret = Rf + Beta [ Rm - Rf ]
= 4% + 1.5 [ 12% - 4% ]
= 4% + 1.5 [ 8% ]
= 4% + 12%
= 16%
| Year | CF | PVF @16% | Disc CF |
| 0 | $ -120.00 | 1.0000 | $ -120.00 |
| 1 | $ 16.00 | 0.8621 | $ 13.79 |
| 2 | $ 16.00 | 0.7432 | $ 11.89 |
| 3 | $ 16.00 | 0.6407 | $ 10.25 |
| 4 | $ 16.00 | 0.5523 | $ 8.84 |
| 5 | $ 16.00 | 0.4761 | $ 7.62 |
| 6 | $ 16.00 | 0.4104 | $ 6.57 |
| 7 | $ 16.00 | 0.3538 | $ 5.66 |
| 8 | $ 16.00 | 0.3050 | $ 4.88 |
| 9 | $ 16.00 | 0.2630 | $ 4.21 |
| 10 | $ 16.00 | 0.2267 | $ 3.63 |
| NPV | $ -42.67 |
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