You invest 150,000 and receive 10,000 in year 1; 20,000 in year 2; 30,000 in year 3;
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- You invest £150,000 and receive £10,000 in year 1; £20,000 in year 2; £30,000 in year 3; and a perpetuity of £10,000 each year from year 4 onwards. The risk free rate is 5% and the average return on the market index is 10%. The beta of the project is 0.8. Is the project desirable?
- Suppose that the perpetuity in the question above ends in year 20. Is the project desirable now?
- You are the chairman of the board for the company that is planning the investment, and you suspect that the project is a “pet project” for your manager. Your experience is that the manager has been very keen to get approval from the board for going ahead. How would you interpret this piece of information? How could you evaluate the project’s chances of success in ways other than a NPV estimate as above? How could the manager convince you that the project is “really” worth while?
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