You are a consultant to a large manufacturing corporation that is considering a
ID: 2806594 • Letter: Y
Question
You are a consultant to a large manufacturing corporation that is considering a project with the following net after-tax cash flows (in millions of dollars):
Years from Now
After Tax Cash Flows
0
-40
1-10
15
The project’s beta is 1.8. Assuming that rf = 8% and E(rM) = 16%, what is the net present value of the project? What is the highest possible beta estimate for the project before its NPV becomes negative?
The expected return or discount rate for the project is:
E(rProject) = rf + [E(rM) – rf]
E(rProject) = 8% + 1.8 [16% - 8%]
E(rProject) = .08 + 1.8 [.16 - .08]
E(rProject) = .08 + 1.8 [.08]
E(rProject) = .08 + .144
E(rProject) = .224 x 100 = 22.4%
On the Financial Calculator:
n = 10, I/Y = 22.4, PMT = -15, FV = 0, CPT PV = $58.09
CPT NPV = $58.09 - $40 = $18.09
On the Financial Calculator:
n = 10, PMT = -15, PV = 40, CPT IRR = 35.73%
The highest possible estimate before its NPV becomes negative:
= [E(rProject) - rf] / [E(rM) – rf]
= [.3573 – .08] / [.16 – .08]
= .2773 / .08 = 3.47
For this question, I would like to know as to what I need to plug in the TI BA II Plus financial calculator to get NPV of 18.09 and IRR of 35.73. Please show me what needs to be plugged in step by step for both NPV and IRR
Years from Now
After Tax Cash Flows
0
-40
1-10
15
Explanation / Answer
As 1st approach is already mentioned, I am sharing the other approach
CF0=-40, CF1=15,CF2=15,CF3=15,CF4=15,CF5=15,CF6=15,CF7=15,CF8=15,CF9=15,CF10=15 CPT IRR I/Y=22.4% CPT NPV
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