CAPM: Capital asset pricing model . This is the method used to find required rate of return , for given level of risk. Calculate the cost of capital as follows: Cost of capital = Riskfree rate + ( Beta × ( Market rate − Riskfree rate ) ) Net present value : Net present value is the difference between the present values of cash inflows minus present value of cash outflows. Calculate the net present value as follows: Net present value = Present value of cash inflows − Initial investment Decision rule: NPV > 0 Accept the project NPV < 0 Reject the project QQ is adding another division that requires initial outlay of $29,500 and generate cash inflows of $6,250. The given the market rate is 11%, risk free rate is 4% and beta is 0.8.

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Chapter 10, Problem 15PROB

Summary Introduction

CAPM: Capital asset pricing model. This is the method used to find required rate of return, for given level of risk.

Calculate the cost of capital as follows:

Cost of capital=Riskfree rate+(Beta×(Market rate−Riskfree rate))

Net present value:

Net present value is the difference between the present values of cash inflows minus present value of cash outflows.

Calculate the net present value as follows:

Net present value=Present value of cash inflows−Initial investment

Decision rule:

NPV>0 Accept the projectNPV<0 Reject the project

QQ is adding another division that requires initial outlay of $29,500 and generate cash inflows of $6,250. The given the market rate is 11%, risk free rate is 4% and beta is 0.8.

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