Question

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 -40
1-10 15
The project's beta is 1.8.
Assuming that rf = 8% and E(rM) = 16%, what is the net present value of the project?

Answer 1

$18.092 million

Step-by-step explanation:

For determining the net present value first we have to find out the cost of equity or discount rate by using the CAPM formula

Cost of equity = Risk-free rate of return + Beta × (Market rate of return - Risk-free rate of return)

= 8% + 1.80 × (16% - 8%)

= 8% + 1.80 × 8%

= 8% + 14.4%

= 22.4%

Now the net present value is shown below:

= -$40 million + $15 million × PVAF(22.4%, 10 years)

= -$40 million + $15 million × 3.8728

= $18.092 million