Question

You are a consultant to a large manufacturing corporation considering a project with the following net after-tax cash flows (in millions of dollars) Years from Now After-Tax CF 1-9 The project's beta is 1.4. Assuming rf - 4% and E ) - 14% a. What is the net present value of the project? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) Net present value b. What is the highest possible beta estimate for the project before its NPV becomes negative? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Highest possible beta value

Answer 1

rate positively ..

		Ans a)	Required rate = Rf+Rm*beta
				4%+(14%-4%)*1.4
				18.00%
			computation of NPV
			year	Cash flow	PVIF @ 18%	Present value
			0	-33	1	(33.00)
			1	12	0.847457627	10.17
			2	12	0.71818443	8.62
			3	12	0.608630873	7.30
			4	12	0.515788875	6.19
			5	12	0.437109216	5.25
			6	12	0.370431539	4.45
			7	12	0.313925033	3.77
			8	12	0.266038164	3.19
			9	12	0.225456071	2.71
			10	24	0.191064467	4.59
						23.22
			NPV =			23.22
		Ans b)	We have to compute IRR using excel
			IRR =	35.21%		=IRR(E11:E21)
			Therefore at IRR project will have Zero NPV, at a rate higher than IRR project will make loss
			Max Beta =		(35.21%-4%)/10%
			Ans =		3.12