NPV ( Net Present Value ) of 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.

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Answer 1

Question

Chapter 9, Problem 8PS

a.

Summary Introduction

To determine: NPV (Net Present Value) of 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.

a.

Expert Solution

Answer to Problem 8PS

$18,092,131.90 is the Net Present Value

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 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.

Calculation of net Present Value,

NetPresentValue=∑i=0NC(1+i)

=[C0+C1(1+i)1+C2(1+i)2+C3(1+i)3+C4(1+i)4+C5(1+i)5+C6(1+i)6+C7(1+i)7+C8(1+i)8+C9(1+i)9+C10(1+i)10]

“C” refers to the cash flow,

“I” refers to discount rate

“t” refers to the time for cash flow

The CAPM equation ism

ExpectedReturn=RiskFreeRate+Beta[ExpectedMarketRisk−RiskFreeRate]

=rf+β[E(rM)−rf]

Er , the expected return

rf , the risk free rate of interest

β , the systematic risk

rM , return on market index

Er=rf+β[E(rM)−rf]=8%+1.8[16%−8%]=8%+1.8[8%]=22.4%

Calculating the NPV of the project,

NetPresentValue=∑i=0NC(1+i)

=[C0+C1(1+i)1+C2(1+i)2+C3(1+i)3+C4(1+i)4+C5(1+i)5+C6(1+i)6+C7(1+i)7+C8(1+i)8+C9(1+i)9+C10(1+i)10]

=[−$40,000,000+$15,000,000(1+0.224)1+$15,000,000(1+0.224)2+$15,000,000(1+0.224)3+$15,000,000(1+0.224)4+$15,000,000(1+0.224)5+$15,000,000(1+0.224)6+$15,000,000(1+0.224)7+$15,000,000(1+0.224)8+$15,000,000(1+0.224)9+$15,000,000(1+0.224)10]

=$18,092,131.90

So the Net Present Value is $18,092,131.90

b.

Summary Introduction

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.

Expert Solution

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 internal rate of return, the NPV will be zero. So first calculate internal rate of return,

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,

Er=rf+β[E(rM)−rf]⇒35.7333%=8%+βi[16%−8%]⇒35.7333%=8%+βi[8%]⇒35.7333%−8%=βi[8%]⇒27.7333%=βi[8%]⇒βi[8%]=27.7333%⇒βi=27.7333%8%=3.47

Before the NPV becomes negative, the highest value of beta is 3.47

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Students have asked these similar questions

You are a consultant to a large manufacturing corporation that is considering a project with the following net after-tax cash flows (in millions of dollars): Years from Now 0 1-10 After-Tax Cash Flow -45 12 The project's beta is 1.4. Required: a. Assuming that ry=6% and E(M) = 14%, what is the net present value of the project? Note: Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places. b. What is the highest possible beta estimate for the project before its NPV becomes negative? Note: Round your answer to 2 decimal places. a. Net present value b. Highest beta

You are a consultant to a large manufacturing corporation that is considering a project with the following net after-tax cash flows (in millions of dollars): Years from Now 0 1-10 After-Tax Cash Flow -50 16 The project's beta is 1.1. Required: a. Assuming that rf= 7% and E(M) = 15%, what is the net present value of the project? Note: Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places. b. What is the highest possible beta estimate for the project before its NPV becomes negative? Note: Round your answer to 2 decimal places.

You are a consultant to a large manufacturing corporation that is considering a project with the following net after-tax cash flows (in millions of dollars): Years from After-Tax Cash Now Flow -100 18 0 1-10 The project's beta is 1.1. Required: a. Assuming that rf= 5% and E(M) = 10%, what is the net present value of the project? Note: Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places. b. What is the highest possible beta estimate for the project before its NPV becomes negative? Note: Round your answer to 2 decimal places. a. Net present value b. Highest beta 1.48

Answer 2

Question

Chapter 9, Problem 8PS

a.

Summary Introduction

To determine: NPV (Net Present Value) of 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.

a.

Expert Solution

Answer to Problem 8PS

$18,092,131.90 is the Net Present Value

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 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.

Calculation of net Present Value,

NetPresentValue=∑i=0NC(1+i)

=[C0+C1(1+i)1+C2(1+i)2+C3(1+i)3+C4(1+i)4+C5(1+i)5+C6(1+i)6+C7(1+i)7+C8(1+i)8+C9(1+i)9+C10(1+i)10]

“C” refers to the cash flow,

“I” refers to discount rate

“t” refers to the time for cash flow

The CAPM equation ism

ExpectedReturn=RiskFreeRate+Beta[ExpectedMarketRisk−RiskFreeRate]

=rf+β[E(rM)−rf]

Er , the expected return

rf , the risk free rate of interest

β , the systematic risk

rM , return on market index

Er=rf+β[E(rM)−rf]=8%+1.8[16%−8%]=8%+1.8[8%]=22.4%

Calculating the NPV of the project,

NetPresentValue=∑i=0NC(1+i)

=[C0+C1(1+i)1+C2(1+i)2+C3(1+i)3+C4(1+i)4+C5(1+i)5+C6(1+i)6+C7(1+i)7+C8(1+i)8+C9(1+i)9+C10(1+i)10]

=[−$40,000,000+$15,000,000(1+0.224)1+$15,000,000(1+0.224)2+$15,000,000(1+0.224)3+$15,000,000(1+0.224)4+$15,000,000(1+0.224)5+$15,000,000(1+0.224)6+$15,000,000(1+0.224)7+$15,000,000(1+0.224)8+$15,000,000(1+0.224)9+$15,000,000(1+0.224)10]

=$18,092,131.90

So the Net Present Value is $18,092,131.90

b.

Summary Introduction

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.

Expert Solution

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 internal rate of return, the NPV will be zero. So first calculate internal rate of return,

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,

Er=rf+β[E(rM)−rf]⇒35.7333%=8%+βi[16%−8%]⇒35.7333%=8%+βi[8%]⇒35.7333%−8%=βi[8%]⇒27.7333%=βi[8%]⇒βi[8%]=27.7333%⇒βi=27.7333%8%=3.47

Before the NPV becomes negative, the highest value of beta is 3.47

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Answer 3

Question

Chapter 9, Problem 8PS

a.

Summary Introduction

To determine: NPV (Net Present Value) of 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.

a.

Expert Solution

Answer to Problem 8PS

$18,092,131.90 is the Net Present Value

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 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.

Calculation of net Present Value,

NetPresentValue=∑i=0NC(1+i)

=[C0+C1(1+i)1+C2(1+i)2+C3(1+i)3+C4(1+i)4+C5(1+i)5+C6(1+i)6+C7(1+i)7+C8(1+i)8+C9(1+i)9+C10(1+i)10]

“C” refers to the cash flow,

“I” refers to discount rate

“t” refers to the time for cash flow

The CAPM equation ism

ExpectedReturn=RiskFreeRate+Beta[ExpectedMarketRisk−RiskFreeRate]

=rf+β[E(rM)−rf]

Er , the expected return

rf , the risk free rate of interest

β , the systematic risk

rM , return on market index

Er=rf+β[E(rM)−rf]=8%+1.8[16%−8%]=8%+1.8[8%]=22.4%

Calculating the NPV of the project,

NetPresentValue=∑i=0NC(1+i)

=[C0+C1(1+i)1+C2(1+i)2+C3(1+i)3+C4(1+i)4+C5(1+i)5+C6(1+i)6+C7(1+i)7+C8(1+i)8+C9(1+i)9+C10(1+i)10]

=[−$40,000,000+$15,000,000(1+0.224)1+$15,000,000(1+0.224)2+$15,000,000(1+0.224)3+$15,000,000(1+0.224)4+$15,000,000(1+0.224)5+$15,000,000(1+0.224)6+$15,000,000(1+0.224)7+$15,000,000(1+0.224)8+$15,000,000(1+0.224)9+$15,000,000(1+0.224)10]

=$18,092,131.90

So the Net Present Value is $18,092,131.90

b.

Summary Introduction

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.

Expert Solution

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 internal rate of return, the NPV will be zero. So first calculate internal rate of return,

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,

Er=rf+β[E(rM)−rf]⇒35.7333%=8%+βi[16%−8%]⇒35.7333%=8%+βi[8%]⇒35.7333%−8%=βi[8%]⇒27.7333%=βi[8%]⇒βi[8%]=27.7333%⇒βi=27.7333%8%=3.47

Before the NPV becomes negative, the highest value of beta is 3.47

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Answer 4

Question

Chapter 9, Problem 8PS

a.

Summary Introduction

To determine: NPV (Net Present Value) of 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.

a.

Expert Solution

Answer to Problem 8PS

$18,092,131.90 is the Net Present Value

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 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.

Calculation of net Present Value,

NetPresentValue=∑i=0NC(1+i)

=[C0+C1(1+i)1+C2(1+i)2+C3(1+i)3+C4(1+i)4+C5(1+i)5+C6(1+i)6+C7(1+i)7+C8(1+i)8+C9(1+i)9+C10(1+i)10]

“C” refers to the cash flow,

“I” refers to discount rate

“t” refers to the time for cash flow

The CAPM equation ism

ExpectedReturn=RiskFreeRate+Beta[ExpectedMarketRisk−RiskFreeRate]

=rf+β[E(rM)−rf]

Er , the expected return

rf , the risk free rate of interest

β , the systematic risk

rM , return on market index

Er=rf+β[E(rM)−rf]=8%+1.8[16%−8%]=8%+1.8[8%]=22.4%

Calculating the NPV of the project,

NetPresentValue=∑i=0NC(1+i)

=[C0+C1(1+i)1+C2(1+i)2+C3(1+i)3+C4(1+i)4+C5(1+i)5+C6(1+i)6+C7(1+i)7+C8(1+i)8+C9(1+i)9+C10(1+i)10]

=[−$40,000,000+$15,000,000(1+0.224)1+$15,000,000(1+0.224)2+$15,000,000(1+0.224)3+$15,000,000(1+0.224)4+$15,000,000(1+0.224)5+$15,000,000(1+0.224)6+$15,000,000(1+0.224)7+$15,000,000(1+0.224)8+$15,000,000(1+0.224)9+$15,000,000(1+0.224)10]

=$18,092,131.90

So the Net Present Value is $18,092,131.90

b.

Summary Introduction

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.

Expert Solution

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 internal rate of return, the NPV will be zero. So first calculate internal rate of return,

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,

Er=rf+β[E(rM)−rf]⇒35.7333%=8%+βi[16%−8%]⇒35.7333%=8%+βi[8%]⇒35.7333%−8%=βi[8%]⇒27.7333%=βi[8%]⇒βi[8%]=27.7333%⇒βi=27.7333%8%=3.47

Before the NPV becomes negative, the highest value of beta is 3.47

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Answer 5

Chapter 9, Problem 8PS

a.

Summary Introduction

To determine: NPV (Net Present Value) of 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.

a.

Expert Solution

Answer to Problem 8PS

$18,092,131.90 is the Net Present Value

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 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.

Calculation of net Present Value,

NetPresentValue=∑i=0NC(1+i)

=[C0+C1(1+i)1+C2(1+i)2+C3(1+i)3+C4(1+i)4+C5(1+i)5+C6(1+i)6+C7(1+i)7+C8(1+i)8+C9(1+i)9+C10(1+i)10]

“C” refers to the cash flow,

“I” refers to discount rate

“t” refers to the time for cash flow

The CAPM equation ism

ExpectedReturn=RiskFreeRate+Beta[ExpectedMarketRisk−RiskFreeRate]

=rf+β[E(rM)−rf]

Er , the expected return

rf , the risk free rate of interest

β , the systematic risk

rM , return on market index

Er=rf+β[E(rM)−rf]=8%+1.8[16%−8%]=8%+1.8[8%]=22.4%

Calculating the NPV of the project,

NetPresentValue=∑i=0NC(1+i)

=[C0+C1(1+i)1+C2(1+i)2+C3(1+i)3+C4(1+i)4+C5(1+i)5+C6(1+i)6+C7(1+i)7+C8(1+i)8+C9(1+i)9+C10(1+i)10]

=[−$40,000,000+$15,000,000(1+0.224)1+$15,000,000(1+0.224)2+$15,000,000(1+0.224)3+$15,000,000(1+0.224)4+$15,000,000(1+0.224)5+$15,000,000(1+0.224)6+$15,000,000(1+0.224)7+$15,000,000(1+0.224)8+$15,000,000(1+0.224)9+$15,000,000(1+0.224)10]

=$18,092,131.90

So the Net Present Value is $18,092,131.90

b.

Summary Introduction

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.

Expert Solution

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 internal rate of return, the NPV will be zero. So first calculate internal rate of return,

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,

Er=rf+β[E(rM)−rf]⇒35.7333%=8%+βi[16%−8%]⇒35.7333%=8%+βi[8%]⇒35.7333%−8%=βi[8%]⇒27.7333%=βi[8%]⇒βi[8%]=27.7333%⇒βi=27.7333%8%=3.47

Before the NPV becomes negative, the highest value of beta is 3.47

Answer 6

Chapter 9, Problem 8PS

a.

Summary Introduction

To determine: NPV (Net Present Value) of 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.

a.

Expert Solution

Answer to Problem 8PS

$18,092,131.90 is the Net Present Value

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 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.

Calculation of net Present Value,

NetPresentValue=∑i=0NC(1+i)

=[C0+C1(1+i)1+C2(1+i)2+C3(1+i)3+C4(1+i)4+C5(1+i)5+C6(1+i)6+C7(1+i)7+C8(1+i)8+C9(1+i)9+C10(1+i)10]

“C” refers to the cash flow,

“I” refers to discount rate

“t” refers to the time for cash flow

The CAPM equation ism

ExpectedReturn=RiskFreeRate+Beta[ExpectedMarketRisk−RiskFreeRate]

=rf+β[E(rM)−rf]

Er , the expected return

rf , the risk free rate of interest

β , the systematic risk

rM , return on market index

Er=rf+β[E(rM)−rf]=8%+1.8[16%−8%]=8%+1.8[8%]=22.4%

Calculating the NPV of the project,

NetPresentValue=∑i=0NC(1+i)

=[C0+C1(1+i)1+C2(1+i)2+C3(1+i)3+C4(1+i)4+C5(1+i)5+C6(1+i)6+C7(1+i)7+C8(1+i)8+C9(1+i)9+C10(1+i)10]

=[−$40,000,000+$15,000,000(1+0.224)1+$15,000,000(1+0.224)2+$15,000,000(1+0.224)3+$15,000,000(1+0.224)4+$15,000,000(1+0.224)5+$15,000,000(1+0.224)6+$15,000,000(1+0.224)7+$15,000,000(1+0.224)8+$15,000,000(1+0.224)9+$15,000,000(1+0.224)10]

=$18,092,131.90

So the Net Present Value is $18,092,131.90

Answer 7

Chapter 9, Problem 8PS

a.

Summary Introduction

To determine: NPV (Net Present Value) of 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.

Answer 8

a.

Expert Solution

Answer to Problem 8PS

$18,092,131.90 is the Net Present Value

Answer 9

a.

Expert Solution

Answer 10

a.

Expert Solution

Answer 11

Expert Solution

Answer 12

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 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.

Calculation of net Present Value,

NetPresentValue=∑i=0NC(1+i)

=[C0+C1(1+i)1+C2(1+i)2+C3(1+i)3+C4(1+i)4+C5(1+i)5+C6(1+i)6+C7(1+i)7+C8(1+i)8+C9(1+i)9+C10(1+i)10]

“C” refers to the cash flow,

“I” refers to discount rate

“t” refers to the time for cash flow

The CAPM equation ism

ExpectedReturn=RiskFreeRate+Beta[ExpectedMarketRisk−RiskFreeRate]

=rf+β[E(rM)−rf]

Er , the expected return

rf , the risk free rate of interest

β , the systematic risk

rM , return on market index

Er=rf+β[E(rM)−rf]=8%+1.8[16%−8%]=8%+1.8[8%]=22.4%

Calculating the NPV of the project,

NetPresentValue=∑i=0NC(1+i)

=[C0+C1(1+i)1+C2(1+i)2+C3(1+i)3+C4(1+i)4+C5(1+i)5+C6(1+i)6+C7(1+i)7+C8(1+i)8+C9(1+i)9+C10(1+i)10]

=[−$40,000,000+$15,000,000(1+0.224)1+$15,000,000(1+0.224)2+$15,000,000(1+0.224)3+$15,000,000(1+0.224)4+$15,000,000(1+0.224)5+$15,000,000(1+0.224)6+$15,000,000(1+0.224)7+$15,000,000(1+0.224)8+$15,000,000(1+0.224)9+$15,000,000(1+0.224)10]

=$18,092,131.90

So the Net Present Value is $18,092,131.90

Answer 13

b.

Summary Introduction

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.

Expert Solution

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 internal rate of return, the NPV will be zero. So first calculate internal rate of return,

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,

Er=rf+β[E(rM)−rf]⇒35.7333%=8%+βi[16%−8%]⇒35.7333%=8%+βi[8%]⇒35.7333%−8%=βi[8%]⇒27.7333%=βi[8%]⇒βi[8%]=27.7333%⇒βi=27.7333%8%=3.47

Before the NPV becomes negative, the highest value of beta is 3.47

Answer 14

b.

Summary Introduction

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.

Answer 15

b.

Expert Solution

Answer to Problem 8PS

3.47 is the highest possible value of beta for the project.

Answer 16

b.

Expert Solution

Answer 17

b.

Expert Solution

Answer 18

Expert Solution

Answer 19

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 internal rate of return, the NPV will be zero. So first calculate internal rate of return,

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,

Er=rf+β[E(rM)−rf]⇒35.7333%=8%+βi[16%−8%]⇒35.7333%=8%+βi[8%]⇒35.7333%−8%=βi[8%]⇒27.7333%=βi[8%]⇒βi[8%]=27.7333%⇒βi=27.7333%8%=3.47

Before the NPV becomes negative, the highest value of beta is 3.47

Answer 20

Ch. 9 - Prob. 1PS Ch. 9 - Prob. 2PS Ch. 9 - Prob. 3PS Ch. 9 - Prob. 4PS Ch. 9 - Prob. 5PS Ch. 9 - Prob. 6PS Ch. 9 - Prob. 7PS Ch. 9 - Prob. 8PS Ch. 9 - Prob. 9PS Ch. 9 - Prob. 10PS

NPV ( Net Present Value ) of 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.

Concept explainers

Videos

To determine: NPV (Net Present Value) of 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.

Answer to Problem 8PS

Explanation of Solution

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.

Answer to Problem 8PS

Explanation of Solution

Want to see more full solutions like this?

Chapter 9 Solutions

NPV ( Net Present Value ) of 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.

Concept explainers

Videos

To determine: NPV (Net Present Value) of 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.

Answer to Problem 8PS

Explanation of Solution

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.

Answer to Problem 8PS

Explanation of Solution

Want to see more full solutions like this?

Chapter 9 Solutions

To determine: NPV (Net Present Value) of 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.

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.