Investment Project Value

This competency assessment addresses assessing the value of investment projects. The Arbitrage Pricing Theory helps calculate required stock returns considering a number of factors. In this Assignment, you will apply Arbitrage Pricing Theory to a business scenario.

Prepare this Assignment as a Word document. List each question followed by your answer.

1. Complete problem: Cost of Equity-CAPM XYZ, Inc. has a beta of 0.8. The yield on a 3-month T-bill is 5%, and the yield on a 10-year T-bond is 7%. The market risk premium is 5.5%, and the return on an average stock in the market last year was 20%. What is the estimated cost of common equity using the CAPM? Show your work.

2. Complete problems: NPV, IRR, MIRR, Profitability Index, Payback, Discounted Payback A project has an initial cost of $60,000, expected net cash inflows of $10,000 per year for 8 years, and a cost of capital of 12%. Show your work.

1. • What is the projects NPV? (Hint: Begin by constructing a timeline).
   • What is the projects IRR?
   • What is the projects MIRR?
   • What is the projects PI?
   • What is the projects payback period?
   • What is the projects discounted payback period?

3. Your division is considering two investment projects, each of which requires an up-front expenditure of 20 million. You estimate that the investment will produce the following net cash flows:

Year Project A Project B

1 $5,000,000 $20,000,000

2 10,000,000 10,000,000

3 20,000,000 6,000,000

2. • What are the two projects net present values, assuming the cost of capital is 5%? 10%? 15%?
   • What are the two projects IRRs at these same costs of capital?

Show your work.