You are considering undertaking a project that has beta of 1.2, an initial cost of $100 million
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Question:
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.
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a) Assuming that the CAPM holds, what is the appropriate discount rate for this project?
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b) What is the NPV of the project?
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c) What is the IRR of the project?
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d) What is the alpha of this project? Does a positive alpha correspond to a positive NPV? Why?
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e) How high can the beta of the project be before the NPV turns negative?
Related Book For
Financial Management for Decision Makers
ISBN: 978-0138011604
2nd Canadian edition
Authors: Peter Atrill, Paul Hurley
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