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 Flow |
0 | –50 |
1–10 | 16 |
The project's beta is 1.1.
a. Assuming that rf = 7% and E(rM) = 15%, what is the net present value of the project? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)
b. What is the highest possible beta estimate for the project before its NPV becomes negative? (
Required rate of return from the project using CAPM = risk free rate + beta*(market return - risk free return)
= 7% + 1.1*(15%-7%)
= 15.8%
NPV = -50 +16*PVAF(15.8%, 10 years)
= -50+16*4.869
= 27.904
B let the return at which NPV = 0 be X
0 = -50 + 16*PVAF(X%, 10 Years)
PVAF (x%, 10 years) = 3.125
PVAF(29%, 10 years) = 3.178
PVAF(30%, 10 years) = 3.092
Using interpolation, X = 29% + (3.178-3.125)/(3.178-3.092)
= 29.62%
29.62 = 7% + beta(15%-7%)
Beta = 2.8275
Or 2.83
Hence, highest possible beta = 2.83
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