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Net Present Value

13. CAPM and Valuation. You are a consultant to a firm evaluating an expansion of its current business. The cash flow forecasts (in millions of dollars) for the project are:

Years Cash Flow
0 -100
1-10 + 15

Based on the behavior of the firm's stock, you believe that the beta of the firm is 1.4. Assuming that the rate of return available on risk-free investments is 4 percent and that the expected rate of return on the market portfolio is 12 percent, what is the net present value of the project?

Solution Preview

First find the cost of capital. For this use the CAPM model. This gives the Cost of Equity as
Cost of Equity = Risk Free ...

Solution Summary

The solution explains the use of CAPM to calculate the required return and to use it to calculate the NPV