Question

# You are a consultant to a large manufacturing corporation that is considering a project with the...

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