2. Suppose the annual return in the stock market is 8%. Suppose company Z has no debt, the risk-free rate is 2% and the beta for Z is 1.15. Managers have proposed a new project whose projected cash are $5 million each year for the next five years. There is no projected residual value. What is the most the firm should invest in this project?
|We have to compute the required rate first using CAPM|
|required rate = Risk free rate+ (market rate- risk free rate)*Beta|
|the most the firm should invest in this project is the present value of future cash flow|
|computation of present value|
|year||Cash flow||PVIF @ 8.9%||present value|
|Therefore maximum investment value =||19,498,823|