You are a consultant to a firm evaluating an expansion of its current business.
ID: 2654297 • Letter: Y
Question
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:
On the basis of the behavior 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 4% and that the expected rate of return on the market portfolio is 12%, what is the net present value of the project? (Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places.)
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:
Explanation / Answer
Question a Cost of equity = rf + Bs(Emkt - rf) = 4% + 1.4(12% - 4%) = 15.2% PV factor Present Year cashflows at 15.2% Value 0 -100 1 -100 1 15 0.868056 13.02083 2 15 0.75352 11.30281 3 15 0.654098 9.811464 4 15 0.567793 8.516896 5 15 0.492876 7.393139 6 15 0.427844 6.417655 7 15 0.371392 5.570881 8 15 0.322389 4.835834 9 15 0.279852 4.197773 10 15 0.242927 3.6439 Total 50 -25.2888 Question b Project should not be accepted.
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