Question
In: Finance
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 is 14%, what is the net present value of the project? (Round your answer to 2 decimal places.) | |
| NPV $ million | |
Solutions
Expert Solution
Cost of equity = Risk free return +Beta ( Market return - Risk free return)
= 6% + 1.4 ( 14% -6%)
= 17.2%
| Particulars | Years | Cash Flows | PVF @ 17.2% | PV |
| Cash flow | 0 | (83.00) | 1.00 | (83.00) |
| Cash flow | 1 | 11.00 | 0.85 | 9.39 |
| Cash flow | 2 | 11.00 | 0.73 | 8.01 |
| Cash flow | 3 | 11.00 | 0.62 | 6.83 |
| Cash flow | 4 | 11.00 | 0.53 | 5.83 |
| Cash flow | 5 | 11.00 | 0.45 | 4.97 |
| Cash flow | 6 | 11.00 | 0.39 | 4.24 |
| Cash flow | 7 | 11.00 | 0.33 | 3.62 |
| Cash flow | 8 | 11.00 | 0.28 | 3.09 |
| Cash flow | 9 | 11.00 | 0.24 | 2.64 |
| Cash flow | 10 | 11.00 | 0.20 | 2.25 |
| Net present value | (32.13) |
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