Question

You are a consultant to a large manufacturing corporation considering a project with the following net after-tax cash flows (in millions of dollars):

Years from Now	After-Tax CF
0	–22
1–9	10
10	20

The project's beta is 1.6. Assuming r_f = 5% and E(r_M) = 15%

a. 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? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

Answer to Part (a) is $20.03 million and part (b) is Beta of 3.98

Answer to Part (a)

1 3 Calculation of CAPM 1.6 1.6 Rf 5% 5% Rm RM 15% 15% 5 RF+B*(RM-RF) 21% 21% 8 Calculation of NPV 11 Present value of cash inflows 12 Present value of cash outflows 13 NPV 42.02722 -22 20.03 14 15 Present Value of Cash inflows Calculation of PVF and PVAF Period 18 Period 1-9 19 Period 10 20 Present Value of cash inflows Amount PVAF PV 10 3.905434 39.05434 20 0.148644 2.972873 42.02722 PVF PVAF 0.826446 0.826446 0.683013 1.50946 0.564474 2.073934 0.466507 2.540441 0.385543 2.925984 0.318631 3.244615 0.263331 3.507946 0.217629 3.725576 0.179859 3.905434 0.148644 4.054078 10

Answer to Part (b)

А. C D E F G H I J K L M N O P Q R S T U Calculation of CAPM <<Using Goal Seek formula>> 3.983547 Goal Seek 5% Rm 15% RF+B*(RM-RF) 44.84% Set cell: $B$11 To value: 22 By changing cell: $C$4 Calculation of NPV 22.00 1 Present value of cash inflows e Present value of cash outflows BNPV OK Cancel 5 Present Value of Cash inflows Calculation of PVF and PVAF Amount Period PVAF 3 Period 1-9 Period 10 Present Value of cash inflows PVAF PV 10 2.150852 21.50852 20 0.024618 0.492358 22.00 out PVF 1 0.690439 0.690439 2 0.476706 1.167144 3 0.329136 1.49628 | 0.227248 1.723528 5 0.156901 1.880429 0.10833 1.988759 7 0.074796 2.063555 8 0.051642 2.115197 9 0.035655 2.150852 10 0.024618 2.17547 10 m