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? |
NPV $_____ ? million
Solutions
Expert Solution
| Required return | Rf+β×Rp | |
| Here, | ||
| Risk free rate of return (Rf) | 6.00% | |
| Beta of the stock (β) | 1.40 | |
| Market risk premium (Rp) | 8.0% | =14%-6% |
| Required return | 17.20% | |
| 6%+1.4×8% |
| Year | Cash flow | [email protected]% | Present value |
| 0 | $ (83) | 1.00000 | -$83.00 |
| 1 | $ 11 | 0.85324 | $9.39 |
| 2 | $ 11 | 0.72802 | $8.01 |
| 3 | $ 11 | 0.62118 | $6.83 |
| 4 | $ 11 | 0.53002 | $5.83 |
| 5 | $ 11 | 0.45223 | $4.97 |
| 6 | $ 11 | 0.38586 | $4.24 |
| 7 | $ 11 | 0.32924 | $3.62 |
| 8 | $ 11 | 0.28092 | $3.09 |
| 9 | $ 11 | 0.23969 | $2.64 |
| 10 | $ 11 | 0.20451 | $2.25 |
| NPV | -$32.13 | ||
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