Determine npv and expected market return, Financial Accounting

Using CAPM's formula,

Return on equity = Risk-free rate + Beta*(Expected market return - risk-free rate)

With the given information,

Return on equity = 1% + 0.55*(8% - 1%) = 4.85%

Hence UCD's expected return on the projected investment is 4.85%. With this and the given information, the NPV of the investment can be determined as follows.

Year

0

1

2

3

4

5

Net cash flow

-$5,000,000.00

$200,000.00

$900,000.00

$1,500,000.00

$1,700,000.00

$2,000,000.00

PVIF @ 4.85%

1

0.9537

0.9096

0.8676

0.8274

0.7891

PV of cash flows

-$5,000,000.00

$190,748.69

$818,663.90

$1,301,325.54

$1,406,614.80

$1,578,293.70

NPV

$295,646.63

 

 

 

 

 

The NPV of the expansion project has been determined to be $295,646.63. Since this is positive and above zero, UCDV should undertake the project, according to the NPV criteria. If UCDV's beta were 1.5 instead of 0.55, the expected return on the investment would be higher and the NPV of the investment will be below zero. Hence the project should not be undertaken by UCDV. This is illustrated below.

 Return on equity = 1% + 1.5*(8% - 1%) = 11. 5%

Year

0

1

2

3

4

5

Net cash flow

-$5,000,000.00

$200,000.00

$900,000.00

$1,500,000.00

$1,700,000.00

$2,000,000.00

PVIF @ 11.5%

1

0.8969

0.8044

0.7214

0.6470

0.5803

PV of cash flows

-$5,000,000.00

$179,372.20

$723,923.67

$1,082,098.16

$1,099,890.50

$1,160,528.10

NPV

-$754,187.38

 

 

 

 

 

Hence the expansion project should be rejected by UCDV if beta was 1.5.

Posted Date: 3/8/2013 6:12:20 AM | Location : United States







Related Discussions:- Determine npv and expected market return, Assignment Help, Ask Question on Determine npv and expected market return, Get Answer, Expert's Help, Determine npv and expected market return Discussions

Write discussion on Determine npv and expected market return
Your posts are moderated
Related Questions
Which of the following procedures involves transferring amounts recorded in the general journal to ledger accounts? Answer   a. preparing a tria

The Red and Blue partnership has been created to operate a law firm. The partners have been attempting to devise a fair system to allocate profits and losses. Red plans to work mor

1. Jepsen Corp had the following transactions relating to shares of stock: • Issued 1,000 shares • Purchased 100 shares • Re-issued 50 shares • Declared and distributed a 2-1 stock

During construction of a building, the cost of interest on a construction loan should be charged to an expense account

How does ordinary shares and preference shares included in the account

Proposals A, B, C, D, E, and F are being considered with money flows over 10 years. Proposal (A and D) are mutually exclusive, (C and F) are also mutually exclusive, and pr

Accounting objectives Accounting has two main objectives: To assist control over the assets and liabilities, and the income and expenditure of the enterprise; and To

Personal representatives duties Personal representation has the following duties; 1) To provide and pay out of the estate of the deceased, the expenses of a reasonable funeral

Ask question Sean Corp. issued a $60,000, 10 year bond at the face rate of 8% annually on 1/1/X0. The market rate was 10%. How much cash will the bond investors receive at the end

You have recently been promoted to assistant audit manager in SHAUNA & Co, a firm of Chartered Certified Accountants. Your first assignment in this new role is to supervise the aud