If Microsoft decides to invest 3 million dollars, and believes it will have sales of 100k in the first year and after that sales will increase by 25% per year for the next 3 years. Also, after those 3 years sales will then grow at a constant 3% rate forever. Market risk premium of 4.4%. Beta .52. Yearly T Bill rate of 2.6% Should I make this investment? Why or why not? Please show NPV and Cash flow formulas.
Required Return = Risk-free Rate + [Beta * Market Risk Premium]
= 2.6% + [0.52 * 4.4%] = 2.6% + 2.288% = 4.888%
PV of revenues = [Sales1 / (1 + r)] + [{Sales1 * (1 + g1)} / (1 + r)2] + [{Sales1 * (1 + g1)2} / (1 + r)3] + [{Sales1 * (1 + g1)3} / (1 + r)4] + [{Sales1 * (1 + g1)3 * (1 + gC)} / {(r - gC) * (1 + r)4}]
= [$100,000 / (1 + 0.04888)] + [{$100,000 * (1 + 0.25)} / (1 + 0.04888)2] + [{$100,000 * (1 + 0.25)2} / (1 + 0.04888)3] + [{$100,000 * (1 + 0.25)3} / (1 + 0.04888)4] + [{$100,000 * (1 + 0.25)3 * (1 + 0.03)} / {(0.0488 - 0.03) * (1 + 0.04888)4}]
= $95,339.79 + $113,620.95 + $135,407.47 + $161,371.49 + $8,803,635.57
= $9,309.375.27
NPV = PV of Revenues - Cost of Investment
= $9,309,375.27 - $3,000,000 = $6,309,375.27
So, we should make this investment as the npv is positive.
If Microsoft decides to invest 3 million dollars, and believes it will have sales of 100k...
If Microsoft decides to invest 3 million dollars, and believes it will have sales of 100k in the first year and after that sales will increase by 25% per year for the next 3 years. Also, after those 3 years sales will then grow at a constant 3% rate forever. Market risk premium of 4.4% Should I make this investment? Why or why not?
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?
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?
with no discount rate given, must be assumed. 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% Should I make this investment? Why or why not?
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