7) Derek Jeter currently has an investment portfolio that contains four stocks w

Question

7) Derek Jeter currently has an investment portfolio that contains four stocks with a total value equal to $80,000. The portfolio has a beta (B) an additional $20,000 in a stock that has -2.4. After Derek adds the new stock to his portfolio, what will be the portfolio's beta? equal to 1.4. Derek wants to invest As the capital budgeting director for Fitzpatrick Coffins Company, you are evaluating construction of a new plant. The plant has a net cost of S5 million in Year 0 (today), and it will provide net cash inflows of $1 million at the end of Year 1, $1.5 million at the end of Year 2, and $2 million at the end of Years 3 through5. If your required rate of return is 13%, what is the plant's Payback, NPV and IRR? 8)

Explanation / Answer

1)

Portfolio beta = (80000*1.4 + 20000*2.4) / (80000+20000)

= 1.6

2)

CF = -5,1,1.5,2,2,2

Payback = 3 + 0.5 / 2 = 3.25 years

NPV = -5 + 1/(1+13%) + 1.5/(1+13%)2 + 2/(1+13%)3 + 2/(1+13%)4 + 2/(1+13%)5 = 0.7579

IRR = IRR({-5,1,1.5,2,2,2}) = 18.37%

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