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 16%, 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

Required return=risk free rate+beta*(market rate-risk free rate)

=3+(16-3)*1.32

=20.16%

Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=17*[1-(1.2016)^-10]/0.2016

=17*4.16980217

=$70.89 million

NPV=Present value of inflows-Present value of outflows

=70.89-100

=$-29.11 million(Approx)(Negative)

jeff jeffy answered 1 year ago

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