You are a consultant to a large manufacturing corporation considering a project
ID: 2716189 • Letter: Y
Question
You are a consultant to a large manufacturing corporation considering a project with the following net after-tax cash flows (in millions of dollars)
The project's beta is 1.8. Assuming rf = 5% and E(rM) = 15%.
What is the net present value of the project? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)
What is the highest possible beta estimate for the project before its NPV becomes negative? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Year from Now After Tax Cash Flow 0 -34 1-9 14 10 28Explanation / Answer
Cost of Capital (Ke) = Rf + Beta (Rm - Rf)
= 5 + 1.8 (15 - 5)
= 23%
NPV = Present Value of Cash inflow – Present value of Cash outflow.
Present value of Cash inflow:-
Years
Cash inflow
Present value factors
Present value of cash inflow
1-9
14
3.673 (NOTE 1)
51.422
10
28
0.126 (for 10th year)
3.528
Total
54.95 (approx)
(NOTE 1):- 3.673 are the cumulative present value factors @ 23% for 9 years.
Present value of cash outflow = 34
a.) Net present value of the project = 54.95 – 34 = 20.95 (in millions of dollars)
Conclusion:- Net present value of the project = 20.95 (in millions of dollars).
Years
Cash inflow
Present value factors
Present value of cash inflow
1-9
14
3.673 (NOTE 1)
51.422
10
28
0.126 (for 10th year)
3.528
Total
54.95 (approx)
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