Question

Question 5

You are considering a project with the following after-tax cash flows (in millions of dollars):

Years from Now           After-tax CF

            0                      -50      

            1-4                   10

            5                      30   

Suppose the project is only financed by equity and its beta is 1.2. Given R_f = 3% and E(R_M) = 10%, you’d use the CAPM to estimate the (equity) cost of capital.

What is the NPV of the project? ______ millions

Answer 1

-SUM(G3:G8) D Е F G Н 1 [email protected]% | Present value 1.0000 $ 2 year Cash flows (50.00) 0S (50.00) 1$ 0.8977 $ 4 10.00 8.98 0.8058 $ 2 $ 5 10.00 8.06 0.7233 $ 3S 7.23 6 10.00 4$ 0.6493 $ 7 10.00 6.49 5 $ 0.5829 $ 30.00 17.49 $ NPV (1.75) Millions 9 10 11 Rf+Beta*(Rm-Rf) 0.03+1.2 (0.10-0.03) 12. Кe 13 14 0.114 11.40% 15 16 G9

f SUM(G3:G8) G9 Е F G Н 1 Cash flows [email protected]% Present value 2 year 3 о |-ЕЗ*ЕЗ -50 1 - F3/ 1.114 =F4/1.114 |=F5/1.114 =F6/1.114 =F7/1.114 -E4*F4 10 4 1 -E5*F5 10 5 2 -E6*F6 10 6 3 -E7*F7 10 7 4 -E8*F8 8 5 30 SUM(G3:G8) Millions 9 NPV 10 11 Rf+Beta*(Rm- Rf) 12 Ke 0.03+1.2*(0.10-0.03) 0.03+1.2*(0.1-0.03) 13 14 -H14 15 16 17