Question

1. A project has an investment cost of CF50m and is expected to produce risky cash flows perpetually and which will, on average, be CF15m per annum but fluctuate with a volatility of 30% per annum. The stock market is expected to have a return of 15% per annum and is likely to experience volatility of 20% per annum. The correlation between the project’s cash flows and the market’s returns is 0.5. The central bank’s treasury bond yield is 300 basis points.

Evaluate the NPV of the project.

(25 marks)

2. Compare and contrast valuation models based on discounted cash flows and valuation approaches based on the relevant multiples of comparable investments.

(10 marks)

Answer 1

200 = 15m Answer Given information, Investment on the project = (F50mA cash flows Expe ted to generated perpetually on an average volatility in cash flous on annual basis =30%. Expected stock market Return = 15).. volatil fility in stock market Return=2018 correlation blw project'y cashflows and the market's returns =0.5 The central bank's treasury bond yield = 31. calculate Beta of cash beta=(variation of cash flows (variation of stock market cash flows &r the market's returns. xos Now, ul Correlation blw project'] beto ( 0.30 0.20 = 0.15

calculerte cost of equirit /egeived rate for referen for purjeet K=Rf+ Retax Com-RB) friety =31.+0.75*(15).–34) treasury -3.1.+0.75x1a/ = 34+91 "Rf= risk free rate Cie stock Rm=market return = = 12.6 Now, Npv = -50+ sum sum 3 we will use k as discounting factor to calculate p>-S8+ 15/6+0-12)+16/(m2)2 + -marglepeted] dinfinite Geometric progression series od Geometric progression sevesa a(-y) putting npu= -50+15/1-12 *(1+1/1412 +11.122+..-pripe-taal) --So+ish2x1/6--10/42) =-50+15/112x9.33 the formula we get, =-50415 CF 75 Mn