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

Draw the event and decision tree, Suppose Real Option Inc. has a product th...

Suppose Real Option Inc. has a product that generates the following cash flow. At t=1, the demand can be high or low with equal probability. If demand is high (low) the cash flo

Partnership accounting, How does ordinary shares and preference shares incl...

How does ordinary shares and preference shares included in the account

Adjudication order-adjudication of debtor, Adjudication order The court...

Adjudication order The court may adjudge the debtor bankrupt on the application of the O.R. or any creditor in the following cases: If the creditors so resolve at their first

Journalizing, Purchased used truck for 8,000 ,paying 2,000 cash and the bal...

Purchased used truck for 8,000 ,paying 2,000 cash and the balance on account

Portfolio''s new beta., Assume you hold a diversified portfolio having of a...

Assume you hold a diversified portfolio having of a $7,500 investment in every of 20 different common stocks. The portfolio's beta is 2.15. Now, assume you sell one of the stocks w

Journal entry for company, 1. Think about the transactions listed below. a....

1. Think about the transactions listed below. a. A company obtains a $10,000 loan from a bank. b. A company purchases $15,000 of inventory from its suppliers. They paid $5,000 toda

Show the management report, Q. Show the Management Report? Management's...

Q. Show the Management Report? Management's Report - Management is essential to include in its annual report its assessment of the effectiveness of the company's internal contr

Experienced auditor, Experienced Auditor - An AUDITOR who has a reasonable ...

Experienced Auditor - An AUDITOR who has a reasonable understanding of audit activities and has studied company's industry as well as accounting and auditing issues relevant to the

Financial managment, How is a company’s cost of capital affected by its tax...

How is a company’s cost of capital affected by its tax rate?

Nature of a deeds of arrangement-bankruptcy and liquidation, Nature of a De...

Nature of a Deeds of Arrangement To avoid the expense and delay involved in a bankruptcy, a debtor in trouble may make a private arrangement with the creditors to accept paymen

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