Question

A project has the following forecasted cash flows: Cash Flows ($ thousands) Co C1 C2 C3 -130 +70 +90 +80 The estimated project beta is 1.56. The market return r'mis 18%, and the risk-free rate rf is 3%.

a. Estimate the opportunity cost of capital and the project’s PV (using the same rate to discount each cash flow). (Do not round intermediate calculations. Enter your cost of capital answer as a percent and enter your PV answer in thousands. Round your answers to 2 decimal places.)

b. What are the certainty-equivalent cash flows in each year? (Do not round intermediate calculations. Enter your answers in thousands rounded to 2 decimal places.)

c. What is the ratio of the certainty-equivalent cash flow to the expected cash flow in each year? (Do not round intermediate calculations. Round your answers to 4 decimal places.)

Answer 1

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projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins - 2x % Cut Σ AutoSum : A Calibri 11 AA = = = pt Wrap Text Number Ea Copy Fill Z Paste B I U D A SF E Merge Merge & Center Center Format Painter $ - % % 4:0 .00 8. Conditional Format Cell Insert Delete Format Sort & Find & Formatting as Table Styles 2 Clear Filter Select Clipboard Font Alignment Number Styles Cells Editing JK137 c =SUM(JK133:JK136) JE JE JG JH JI J JK JL M N O P Q 121 122 123 124 ke = Rf + beta(Rm-Rf) 125 ke = 3% + 1.56(18%-3%) 126 ke = 26.40% 127 128 COST OF CAPITAL = 26.40% NOTE ON 130 PV FACTOR PV OF PV FACTOR 131 YEAR CE AT 26.40% CF 1/(1+r)^n 132 Α A*B 133 134 1 70 0.79113955.38 1/(1+0.264)^1 135 90 0.625901 56.33 1/(1+0.264)^2 136 80 0.495175 39.61 1/(1+0.264)^3 137 PV = 151.32 138 139 CERTAINTY EQUIVALENT CASH FLOW I RRnpvbeta RATION PBP ARR invest, EAA MI-np-ir_ REPLACEMENT S HPR GMAM EAC MACRS NPV RELEVANT BETA LEVERED REPLACEMENT BOND OPTION TO WAITSTEIN II Rea ferences: KQ79 BOU 130% 0 SPOR 9 * ENG 21-11-2019 129

- 2x Σ AutoSum : A Fill Z Sort & 2 Clear Filter Editing Find & Select Cells O JPJQ projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins % Cut Calibri -11AA = = = Dr Wrap Text General Ea Copy Paste B I Format Painter U - D A Merge & Center $ - % 8. Formatting as Table Styles Clipboard Font Alignment Number Styles JO150 for JE JE G H I J K L M N 138 139 CERTAINTY EQUIVALENT CASH FLOW 140 PV OF FV FACTOR FV OF NOTE ON 141 YEAR CE AT 3% CF FV FACTOR AT 7% 142 A B A*B (1+r)^n 143 144 55.38 1.030000 57.04 (1+0.07)^1 145 56.33 1.060900 59.76 (1+0.07)^2 39.61 1.092727 43.29 (1+0.07)^3 147 PV = 160.09 146 148 YEAR EXPECTED RATIO CERTAINTY EQUIVALENT CE 149 150 151 152 153 154 A/B 57.04 59.76 43.29 70.00 90.00 80.00 0.8149 0.6640 0.5411 155 156 H invest, EAA MI-np-ir_ REPLACEMENT S HPR GMAM EAC MACRS NPV RELEVANT BETA LEVERED REPLACEMENT BOND I RRnpvbeta RATION PBP ARR ferences: KQ79 OPTION TO WAIT BO 130% STEIN II Rea 0 + . B 9 . * ENG 21-11-2019