A project has the following expected net cash flows associated with it: Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 -R 800 000 R150 000 R200 000 R400 000 R100 000 R100 000 The cash flows are expressed in real terms. Adjust the cash flows to nominal terms assuming constant inflation of 5% and calculate the NPV of the project. The company in question has a WACC of 10%.
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
A project has the following expected net cash flows associated with it:
Year 0 |
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
-R 800 000 |
R150 000 |
R200 000 |
R400 000 |
R100 000 |
R100 000 |
The cash flows are expressed in real terms. Adjust the cash flows to nominal terms assuming constant inflation of 5% and calculate the NPV of the project. The company in question has a WACC of 10%.
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