Question

Epsilon Corp. is evaluating an expansion of its business. The cash-flow forecasts for the project are as follows: Cash Flow Years r (S milions) 1-10 -250 53 The firm's existing assets have a beta o11 2. The risk-free interest rate is 3% and the expected return on the mar et portfolio is 12% what is the project's NPV Enter your answer in millions. A negative answer should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.) NPV million

Answer 1

Using CAPM, Expected Rate of Return is - Risk free rate of Return+(Beta Market Return - Risk free Rate of Return)) Expected Rate of Return 15-3%+(1.20*(12%-3%)) Expected Rate of Return is 3%+10.80% Expected Rate of Return is-13.80% Computation of NPV of Project Cashflows at 13.80% :. Cash flows PVF Present Year in Miln $ @13.80% Value S (250.00) 53.00 53.00 53.00 53.00 53.00 53.00 53.00 53.00 53.00 53.00 1.0000 0.8787 0.7722 0.6785 0.5963 0.5239 0.4604 0.4046 0.3555 0.3124 0.2745 Net Present Value (250.00) 46.57 40.93 35.96 31.60 27.77 24.40 21.44 18.84 16.56 14.55 28.63 10 NPV is $ 28.63. Million