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Company Y: What is the project's NPV (in millions of dollars)?

Can you help me with this assignment?

Returns on the market and Company Y's stock during the last 3 years are shown below:

Year Market Company Y
2002 -24% -22%
2003 10 13
2004 22 36

The risk-free rate is 5 percent, and the required return on the market is 11 percent. You are considering a low-risk project whose market beta is 0.5 less than the company's overall corporate beta. You finance only with equity, all of which comes from retained earnings. The project has a cost of $500 million, and it is expected to provide cash flows of $100 million per year at the end of Years 1 through 5 and then $50 million per year at the end of Years 6 through 10. What is the project's NPV (in millions of dollars)?

a. $ 7.10
b. $ 9.26
c. $10.42
d. $12.10
e. $15.75

Solution Preview

First, run a regression to find the corporate beta. Market returns are the X-input values, while Y's returns are the Y-input values. Beta is ...

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$2.19