FREE Trial

A project costing $100 will produce perpetual net cash flows that have an annual volatility of 35%

Question:

A project costing $100 will produce perpetual net cash flows that have an annual volatility of 35% with no expected growth. If the project existed, net cash flows today would be $8. The project beta is 0.5, the effective annual risk-free rate is 5%, and the effective annual risk premium on the market is 8%. What is the static NPV of the project? What would you pay to acquire the rights to this project if investment rights lasted only 3 years? What would you pay to acquire perpetual investment rights?
Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Answer rating: 88% (9 reviews)

The discount rate is r r m r 005 05 008 009 The current value of the future cash flows will be 8009 ...View the full answer


answer-question-section
Answered By
tutor-profile-image
Branice Buyengo Ajevi
I have been teaching for the last 5 years which has strengthened my interaction with students of different level.
4.30+ 1+ Reviews 10+ Question Solved
Related Book For  book-img-for-question
Derivatives Markets

Derivatives Markets

ISBN: 978-0321543080

4th edition

Authors: Rober L. Macdonald

See More Books
Question Posted:
See More Questions

Related Video

NPV stands for \"Net Present Value,\" which is a financial concept used to determine the value of an investment or project. It measures the difference between the present value of cash inflows and the present value of cash outflows over a given period of time, using a specific discount rate. To calculate the NPV of an investment, you need to first estimate the cash inflows and outflows associated with the investment, and then discount them back to their present values using a discount rate. The discount rate represents the cost of capital or the expected rate of return required by investors. The formula for calculating NPV is: NPV = sum of (cash inflows / (1 + discount rate)^t) - sum of (cash outflows / (1 + discount rate)^t) Where: Cash inflows: the expected cash received from the investment Cash outflows: the expected cash paid out for the investment Discount rate: the required rate of return or the cost of capital t: the time period in which the cash flow occurs If the NPV is positive, it means that the investment is expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a good investment. If the NPV is negative, it means that the investment is not expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a bad investment.

Students also viewed these Banking questions

Aoremon Toothbrush Heads Compatible With Philips Sonicare - ISBN: B0CHFJH5Y4 - Free Book