Question: (a) A project will generate a cash flow after one year. The value of the cash flow is contingent on the state of the industry

(a) A project will generate a cash flow after one year.

(a) A project will generate a cash flow after one year. The value of the cash flow is contingent on the state of the industry after one year: The risk-free interest rate is 3%. (i) Find the mean and standard deviation of this cash flow. (ii) Find the present value of the project if the investors require a risk premium equals to 60% of the standard deviation of the project return (project return=project cash flow/PV-1). (iii) Find the present value of the project if CAPM holds. (b) A farmer is considering the purchase of live cattle that will be ready for slaughter 6 months from now, at which point their aggregate weight will be 100,000 pounds. The asking price for the cattle is $85,000 and it will cost $20,000 to buy feed and medication for all the cattle. The (unannualized) risk-free interest rate over this 6-month period is 2%, and the only source of uncertainty associated with this transaction is the future market price of cattle. However, on the Chicago Mercantile Exchange, the 6-month forward price for cattle is $1.12 per pound. Should the farmer buy the cattle

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