Question: Problem 5 - CAPM and Project Evaluation [10 marks] You are considering undertaking a project with a beta of 0.75, an initial cost of $100

Problem 5 - CAPM and Project Evaluation [10 marks] You are considering undertaking a project with a beta of 0.75, an initial cost of $100 million and annual after-tax inflows of $7.2 million for 25 years starting at the beginning of next year. The risk-free rate is 2% and the market is expected to yield 5% per year over the life of the project. a) Assuming that the CAPM holds, what is the appropriate discount rate for this project? [2 marks] b) What is the NPV of the project? [2 marks] c) What is the IRR of the project? (Hint: Use the solver function in MS Excel) [2 marks] d) What is the alpha of this project? Does a positive alpha correspond to a positive NPV? Why? [2 marks] e) How high can the beta of the project go before the NPV turns negative? [2 marks]

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