Quantitative Methods Q53
0. The expected cash flows of a project are given below:
| Time | Cash Flow ($) |
| 0 | (180,000) |
| 1 | 100,000 |
| 2 | 200,000 |
| 3 | 250,000 |
Given that the risk-free rate is assumed to be 3 percent, the market risk premium is 6 percent, the beta for the project is 1.2 and the expected inflation is 2 percent, the investment’s net present value (NPV) is closest to:
- Option : C
- Explanation : Opportunity cost of capital for the investment = risk free rate + the market risk premium * beta Opportunity cost = 3% + (6% x 1.2) = 10.2%. The NPV equals the present value (at t = 0) of the future cash flows discounte at the opportunity cost of capital (10.2%) minus the initial investment, or $123,725. Using a financial calculator, solve for NPV. CF0= –180,000, CF1= 100,000, CF2= 200,000, CF3= 250,000, %i = 10.2, CPT NPV = 262,241.84 ≈ 262,000.
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