Consider a project with expected annual revenues of $200 and costs of $80 in perpetuity. The costs
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Question:
Consider a project with expected annual revenues of $200 and costs of $80 in perpetuity. The costs are completely variable, so that the profit margin of the project will remain constant. Suppose the project has a beta of 1.2, the risk-free rate is 4%, and the expected return of the market is 8%.
–What is the value of this project?
–What would its value and beta be if the revenues continued to vary with a beta of 1.2, but the costs were instead completely fixed at $80 per year?
-what if costs were half variable and half fixed?
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