Question

A project has the following forecasted cash flows:
Cash flows

C0         C1    C2     C3
(100)     40     60   50
The estimated project beta is 1.5. The market return r m is 16%, and the risk-free rate r f is 7%.
a. Estimate the opportunity cost of capital and the project’s PV (using the same rate to
discount each cash flow).
b. What are the certainty-equivalent cash flows in each year?
c. What is the ratio of the certainty-equivalent cash flow to the expected cash flow in each
year?
d. Explain why this ratio declines.
      

Answer 1

It calculation of opportunity cost of capital y Calculation of NPV using 10% discount rates Cash flow Discount factor of Present value 0.909 36.36 49.56 37.55 0.751 (-) Initial Investment NPV-1 NPV using 25% 123.47 100 23:47 discount rates Present value 1x Calculation of Cash flow Discount factor @ 30% 60 0,7 692 0.5917 0,4552 30.768 35.502 22.76 89.03 100 (-) Initial Investment -Nov-2 10.97