Question

You are a consultant to a firm evaluating an expansion of its current business. The cash-flow forecasts (in millions of dollars) for the project are as follows:

Years	Cash Flow
0		- 100
1 - 10		+ 18

On the basis of the behavior of the firm’s stock, you believe that the beta of the firm is 1.45. Assume that the rate of return available on risk-free investments is 6% and that the expected rate of return on the market portfolio is 14%.

a. What is the project IRR? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

b. What is the cost of capital for the project? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Answer 1

fx =IRR(L24:L34) L36 JK M N O Year 1 Cashflows $ (100.00) $ 18.00 $ 18.00 18.00 18.00 18.00 18.00 18.00 18.00 18.00 18.00 IRR(values) 12.41% 10 IRR IRR b Cost of capital Risk free return. Return on market Rm Rf+Beta*(Rm-Rf) 0.06+1.45*(0.14-0.06) 0.176 17.60%