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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