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; Years from Now After-Tax CF 1-9 10 -24 10 20 The project's beta is 1.8. Assuming rf24% and E( -14% 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 million answer to 2 decimal places.) Highest possible beta value References eBook & Resources Learning Objective: 07-02 Construct and use the security market line. Worksheet

Explanation / Answer

Solution:

The rate needed to discount the cash flow is the expected return rate.

E( r ) = 0.04 + 1.8 (0.14-0.04)

E( r ) = 0.04 + 1.8 (0.10)

E( r ) = 0.22

E( r ) = 22%

NPV = 16.60

b. IRR, using financial calculator, we get 40.87%

Highest best estimate = (0.4087 - 0.04)/(0.14 - 0.04)

Highest best estimate = 3.69

Year CF PVIF@22% PV 0 -24 1 -24 1 10 0.8196721 8.196721 2 10 0.6718624 6.718624 3 10 0.5507069 5.507069 4 10 0.4513991 4.513991 5 10 0.3699993 3.699993 6 10 0.3032781 3.032781 7 10 0.2485886 2.485886 8 10 0.2037611 2.037611 9 10 0.1670173 1.670173 10 20 0.1368994 2.737989 NPV = 16.60084

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.