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If I invest 3 million dollars, and I believe I will have sales of 100k in...

If I invest 3 million dollars, and I believe I will have sales of 100k in the first year and after that sales will increase by 25% per year for the next 3 years. After that sales will grow at a constant 3% rate forever. Market risk premium of 4.4%. 1 year tbill yield curve of 2.6%. Beta is .52. Should I make this investment? Why or why not?

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Answer #1

Capital Asset pricing model:

As per CAPM model:
Re= Rf+(Rm-Rf)B

Re= required rate of return.
Rf= Risk-free rate.
Rm =Market Risk Premium.
B = Beta, systematic risk.

Re= 2.6+(4.4-2.6)×0.52
Re= 3.536%


Net present value.
NPV = present value of cash inflow- the present value of cash outflow.

Discounted at the cost of capital/required rate of return (3.536% ).

NPV= $30,185,502.54

The company should accept the project
As NPV is positive.

(Please check if the investment amount is $3million Because the NPV is abnormally High for such an investment).

Salee year 1: year2 : 100poo CF2! (CF1) (F1x1.250 125,000 yeal 3 - CF B 3! CF 1*(1.25) 2 156,250 1 4:- CF4! CF 2 x (1.25) 195

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