Question: Problem 5 CAPM and Project Evaluation (10 marks] You are considering undertaking a project that has beta of 1.2, an initial cost of $100 million

Problem 5 CAPM and Project Evaluation (10 marks] You are considering

Problem 5 CAPM and Project Evaluation (10 marks] You are considering undertaking a project that has beta of 1.2, an initial cost of $100 million and annual after-tax inflows of $10 million for 20 years starting at the beginning of next year. The risk-free rate is 2% and the market is expected to yield 5% over the next year. 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? [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 be before the NPV turns negative? [2 marks]

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