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a.
To determine: NPV (
Introduction: The net present value helps to an organization for taking decisions regarding the growth of investment and the business. It analyzes the profitability of the project through capital budgeting.
a.
Answer to Problem 8PS
$18,092,131.90 is the Net
Explanation of Solution
Given Information:
The beta value, risk free rate of interest, expected return on market is given.
Net present value is the discounting of present value of
Calculation of net Present Value,
“C” refers to the cash flow,
“I” refers to discount rate
“t” refers to the time for cash flow
The
Calculating the NPV of the project,
So the Net Present Value is $18,092,131.90
b.
To determine: The highest possible beta for the project
Introduction: The net present value helps to an organization for taking decisions regarding the growth of investment and the business. It analyzes the profitability of the project through capital budgeting.
b.
Answer to Problem 8PS
3.47 is the highest possible value of beta for the project.
Explanation of Solution
Given Information:
The risk free rate of interest, expected return on market is given.
Net present value is the discounting of present value of cash inflow and outflow at a specified rate. When the NPV becomes positive, then the investment is profitable. It analyzes the profitability of the project.
At
| YEAR | CASH FLOW ($) |
| 0 | -40,000,000 |
| 1 | 15,000,000 |
| 2 | 15,000,000 |
| 3 | 15,000,000 |
| 4 | 15,000,000 |
| 5 | 15,000,000 |
| 6 | 15,000,000 |
| 7 | 15,000,000 |
| 8 | 15,000,000 |
| 9 | 15,000,000 |
| 10 | 15,000,000 |
| IRR | 35.7333% |
The calculation of Beta,
Before the NPV becomes negative, the highest value of beta is 3.47
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Chapter 9 Solutions
EBK INVESTMENTS
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EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT