Question

You are a consultant to a large manufacturing corporation that is considering a project with the following net after-tax cash flows (in milions of dollars): The project's beta is 1.3 . a. Assuming that r =7% and E(r M )=14%, what is the net present value of the project? (Do not round Intermedlate caleulations. Enter your answer In millions rounded to 2 decimal pleces.) b. What is the highest possible beta estimate for the project before its NPV becomes negative? (Round your answer to 2 decimal pleces.) Answer is complete but not entirely correct.

Answer 1

The net present value (NPV) of a project can be calculated by discounting the future cash flows at the given required rate of return. The highest possible beta estimate for the project before its NPV becomes negative can be determined by using the relevant formula.

Step-by-step explanation:

The net present value (NPV) of a project can be calculated by discounting the future cash flows at the given required rate of return. In this case, the net after-tax cash flows for the project are provided. To calculate the NPV, we need to discount these cash flows to their present values using the given discount rate of 7%. Once we have the present values, we can sum them up to get the total NPV of the project.

For part b, the highest possible beta estimate for the project before its NPV becomes negative can be determined by using the relevant formula. By solving the formula, we can find the maximum beta estimate.