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Finding NPV's of Projects with different risks

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Assume the expected return on the market portfolio is 15% and the riskless return is 9%. Also assume that all of the projects listed here are perpetuies with annual cash flows (in $) and betas as indicated. None of the projects requires or precludes any of the other projects, and each project costs $2,000.

a.What is the NPV of each project?
b.Which projects should the firm undertake?

PROJECT A B C D E F
Annual cash flow 310 500 435 270 385 450
Beta 1.00 2.25 2.22 0.65 1.37 2.36

Please show how you got your answer in excel.

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Solution Summary

Solution describes the methodology to find NPV of projects with different risks.

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Please refer attached file for better clarity of tables and formulas.

Solution:

Let us find expected rate of return for each project.
Risk Free return Market return Beta Expected rate of return
rf rm b r=rf+b*(rm-rf)
Project A 9% 15% 1 15.00%
B 9% 15% 2.25 ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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