Determine npv and expected market return, Financial Accounting

Assignment Help:

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.


Related Discussions:- Determine npv and expected market return

Income statements, how to solve the question income statements

how to solve the question income statements

OPERATING CYCLE, #question.DISCUSS THE APPLICABILITY OF AN OPERATING CYCLE ...

#question.DISCUSS THE APPLICABILITY OF AN OPERATING CYCLE IN POULTRY BUSINESS.

Homework, i have some homework that need help

i have some homework that need help

Wider-range investments-accounts under trustee, Wider-range Investments ...

Wider-range Investments (Requiring advice in writing from a properly qualified person) Quoted shares of a company with a paid-up capital of not less than Shs10m and has

Determine the overvalue or undervalue of share, The New York Jets have deci...

The New York Jets have decided to go public and are offering new shares for $40. Since the Jets want to build a new stadium, the firm will retain all earnings and will not issue an

compute cv, The managers of Merton Medical Clinic are analyzing a proposed...

The managers of Merton Medical Clinic are analyzing a proposed project. The project's most likely NPV is $120,000, but, as evidenced by the following NPV distribution, there is con

Perform horizontal financial analysis, For this assignment you are acting a...

For this assignment you are acting as a financial analyst for Apple Inc. Apple Inc. Is one of the most innovative companies worldwide. For example, in November 2012 Apple sold 3 mi

Required return on equity, Q. Required return on equity? Required retu...

Q. Required return on equity? Required return on equity Where D 1 = Next year's dividend g = Dividend growth rate P o = Market price of share r = Percentag

Effect of releasing accounting information, The objective of this project i...

The objective of this project is to demonstrate the effect of releasing accounting information concerning profits on the valuation (i.e. share price) of an Australian;listed compan

Sec reporting implications, SEC reporting implications i) Potentially i...

SEC reporting implications i) Potentially inaccurate reporting of executive compensation in proxy statements and annual reports ii) Potential violation of securities and Law

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd