You are a consultant to a firm evaluating an expansion of its current business.
ID: 2756181 • 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 1.3. 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 11%, 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.)
Years Cash Flow 0 120 1–10 +15Explanation / Answer
Required return on stock =Rf + [Beta (Rm -Rf) ]
= 4 + [1.3 (11 - 4 ) ]
= 4+ [1.3 * 7 ]
= 4 + 9.1
= 13.10 %
Present value of cash flow = (PVAF10, 13.10%, Annual cash lfow)
= (5.40463 * 15 )
= $ 81.0694
NPV = Present value -Initial investment
= 81.0694 - 120
= - 38.9306
b)No,As NPV is negative.
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