Question

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:

Years	Cash Flow
0	–	100
1-10	+	17

On the basis of the behavior of the firm’s stock, you believe that the beta of the firm is 1.44. Assuming that the rate of return available on risk-free investments is 5% and that the expected rate of return on the market portfolio is 11%, what is the net present value of the project? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in millions of dollars rounded to 2 decimal places.)

Answer 1

Calculation of discounting rate
R = Rf+ B(Rm-Rf)
Where,
Rf = Risk Free Return
B= Beta
Rm = Market rate of return
Rm-Rf= Risk Premium
=0.05+1.44*(0.11-0.05)
=0.05+1.44*(0.06)
=13.64 %
Year	Cash Flow	PV Factor	PV Of Cash Flow
a	b	c=1/1.1364^a	d=b*c
0	$      -100	1.0000	$               -100.00
1	$          17	0.8800	$                   14.96
2	$          17	0.7744	$                   13.16
3	$          17	0.6814	$                   11.58
4	$          17	0.5996	$                   10.19
5	$          17	0.5276	$                     8.97
6	$          17	0.4643	$                     7.89
7	$          17	0.4086	$                     6.95
8	$          17	0.3595	$                     6.11
9	$          17	0.3164	$                     5.38
10	$          17	0.2784	$                     4.73
NPV			$                 -10.07