Purchase Solution

Finding NPVs with differing project risks, Project selection

Not what you're looking for?

Ask Custom Question

Assume the expected return on the market portfolio is 15% and the riskless return is 9%. Also assume that all of the projects listed here are perpetuities with annual cash flows (in $) and betas as indicated. None of the projects requires or precludes any of the other projects, and each project costs $2,000

1. What is the NPV of each project?
2. Which projects should the firm undertake?

PROJECT A B C D E F
Annual cash flow 310 500 435 270 385 450
Beta 1.00 2.25 2.22 0.65 1.37 2.36

Purchase this Solution
Solution Summary

Solution clearly explains the criteria for selecting projects among a set of given projects based on NPV (Net Present Value) calculation.

Solution Preview

You can also have a look at solution in the attached document.

>> Solution <<

a.
r = rf + &#946;(rm - rf)
CF = $2,000

PVPerpetuity = CF / r

rA = 9% + 1.00(15% ...

Purchase this Solution
Free BrainMass Quizzes
Social Media: Pinterest

This quiz introduces basic concepts of Pinterest social media

Academic Reading and Writing: Critical Thinking

Importance of Critical Thinking

IPOs

This Quiz is compiled of questions that pertain to IPOs (Initial Public Offerings)

Understanding the Accounting Equation

These 10 questions help a new student of accounting to understand the basic premise of accounting and how it is applied to the business world.

Writing Business Plans

This quiz will test your understanding of how to write good business plans, the usual components of a good plan, purposes, terms, and writing style tips.

View More Free Quizzes
Related BrainMass Solutions

  • Finding NPVs

    311849 Finding NPVs with differing project risks (Finding NPVs with differing project risks) Assume the expected return on the market portfolio is 15% and the riskless return is 9%.

  • Projects Firm Undertake

    Problem A7: (Finding NPVs with differing project risks) Assume the expected return on the market portfolio is 15% and the riskless return is 9%.

  • Given mutually exclusive projects, select using NPV profile

    Looking at the NPV profile, Project B will have a higher NPV at 17% Answer is B The solution explains how NPV profile can be used in the selection of mutually exclusive projects

  • project selection and risk.

    483066 project selection and risk. What are some ways in which project selection affects risk? How can these risks can be reduced? Step 1 Project selection involves defining selection criteria and weightings.

  • Incorporation of risk into PV and NPV

    If a project is more risky than the Project B, then the discount rate used for finding out the present value of cash inflows for project A should be more than the discount rate used for the finding out the present value of the project B.

  • A firm uses a single discount rate to compute the NPV of all its potential capital budgeting projects

    The correlation between undertaking projects with positive NPVs and risk is explained.

  • Country risk assessment

    Then looking at the distribution of NPV we can make the decision whether to go ahead with the project or not. If most of the NPVs are positive, then even with the risk, the project may be acceptable.

  • Depreciation tax shields

    The firm should accept neither project. As both the firms are negative NPVs. 27. What effect would depreciation have on the projects selection criteria: a.

  • Calculating Mutually Exclusive Projects

    Can the question be resolved with this information alone? b. Calculate the variance and standard deviation of the NPVs for both projects. Which project appears to be riskier? c. Calculate the coefficient of variation for both projects.

View More Related Solutions