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:

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.)

Solutions

Expert Solution

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

Related Solutions

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: 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 1.32. Assuming that the rate of return available on risk-free investments is 3% and that the expected rate of return on the market portfolio is...
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...
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: Years Cash Flow 0 −260 1–10 +60 a. On the basis of the behavior of the firm’s stock, you believe that the beta of the firm is 1.3. Assuming that the rate of return available on risk-free investments is 6% and that the expected rate of return on the market portfolio is 14%,...
You are a consultant to a firm evaluating an expansion of its current business.
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 1.39. Assuming that the rate of return available on risk-free investments is 6% and that the expected rate of return on the market portfolio is...
You are a consultant to a firm evaluating an expansion of its current business. The annual...
You are a consultant to a firm evaluating an expansion of its current business. The annual cash flow forecasts (in millions of dollars) for the project are:             Years Annual Cash Flow 0 -83 1 - 10 11         Based on the behaviour of the firm's stock, you believe that the beta of the firm is 1.4. Assuming that the rate of return available on risk-free investments is 6% and that the expected rate of return on the market portfolio...
You are a consultant to a firm evaluating an expansion of its current business. The annual...
You are a consultant to a firm evaluating an expansion of its current business. The annual cash flow forecasts (in millions of dollars) for the project are:             Years Annual Cash Flow 0 -83 1 - 10 11         Based on the behaviour of the firm's stock, you believe that the beta of the firm is 1.4. Assuming that the rate of return available on risk-free investments is 6% and that the expected rate of return on the market portfolio...
Type 2D: You are a consultant to a firm evaluating an expansion of its current business....
Type 2D: 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 100, Years 1 to 8: 18 each year. On the basis of the behavior of the firm’s stock, you believe that the beta of the firm is 1.0. Assuming that the rate of return available on risk-free investment is 4% and that the expected rate of...
Epsilon Corp. is evaluating an expansion of its business. The cash-flow forecasts for the project are...
Epsilon Corp. is evaluating an expansion of its business. The cash-flow forecasts for the project are as follows: Years Cash Flow ($ millions) 0 −180 1-12 46 The firm's existing assets have a beta of 2.2. The risk-free interest rate is 4% and the expected return on the market portfolio is 10%. 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...
Epsilon Corp. is evaluating an expansion of its business. The cash-flow forecasts for the project are...
Epsilon Corp. is evaluating an expansion of its business. The cash-flow forecasts for the project are as follows: Years Cash Flow ($ millions) 0 −185 1-12 55 The firm's existing assets have a beta of 1.4. The risk-free interest rate is 5% and the expected return on the market portfolio is 14%. 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...
Free cash flow valuation You are evaluating the potential purchase of a small business with no...
Free cash flow valuation You are evaluating the potential purchase of a small business with no debt or preferred stock that is currently generating $42,500 of free cash flow (FCF0=$42,500)(FCF0=$42,500). On the basis of a review of similar-risk investment opportunities, you must earn an 18% rate of return on the proposed purchase. Because you are relatively uncertain about future cash flows, you decide to estimate the firm’s value using several possible assumptions about the growth rate of cash flows. What...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT