You are a consultant to a firm evaluating an expansion of its current business.

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: Years Cash Flow 0 – 100 1–10 + 18 On the basis of the behavior of the firm’s stock, you believe that the beta of the firm is 1.38. Assuming that the rate of return available on risk-free investments is 7% and that the expected rate of return on the market portfolio is 15%, what is the net present value of the project? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in millions of dollars rounded to 2 decimal places.)

Explanation / Answer

Given Rf 7% Rm 15% Beta 1.38 Using Capital Asset pricing model to determine the Expected return rf+B(Rm-Rf) 7+8(1.38) 18.04% Net present value of the project @18.04% Year Cashflow Present value@18.04% Discounted cashflow 0 -100 1 -$100 1 to 10 18 4.488 $80.784 NPV -$19.216

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