You are a consultant to a large manufacturing corporation considering a project

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): After-Tax CF -35 14 28 1-9 10 The project's beta is 1.9. Assuming rf-6% and E(rr)-16% a. What is the net present value of the project? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) Net present value b. 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.) Highest possible beta value million

Explanation / Answer

required return = 6 + 1.9*10 = 25%

a. NPV = 16.49

IRR of the project = 39.1019%

b. highest beta = (39.1019 - 6)/10 = 3.31

25.00% Cash flows Year Discounted CF                  (35.00) 0 -35.00                     14.00 1 11.20                     14.00 2 8.96                     14.00 3 7.17                     14.00 4 5.73                     14.00 5 4.59                     14.00 6 3.67                     14.00 7 2.94                     14.00 8 2.35                     14.00 9 1.88                     28.00 10 3.01

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