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A project requires an initial outlay of $60,000 and is expected to yield an annual cash flow of E(X) = $10,000. The cash flow is a perpetuity. The project's beta is 2, the market portfolio's mean rate of return is E(Rm) = 15%, and the riskless interest rate, r, is 4%. The firm is an all-equity firm.
Should the firm accept the project?
What is the project's NPV?

Solution Preview

We first need to calculate the cost of equity. Use the following formula:
re= rf + B*Risk Premium
=> ...

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