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- A project has a forecasted cash flow of $125 in year 1 and $136 in year 2. The interest rate is 8%, the estimated risk premium on the market is 11.25%, and the project has a beta of 0.65. If you use a constant risk-adjusted discount rate, answer the following: a. What is the PV of the project? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Present value $ Year 1 Year 2 210.68 b. What is the certainty-equivalent cash flow in year 1 and year 2? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Certainty- Equivalent Cash FlowThere are two types of projects in the market: A (safer) and B (riskier). At time 1, the payoff of A will be either $500 (probability 0.75) or $300 (probability 0.25). The appropriate discount rate for project A is 12%. The minimum price A can accept is $350. The payoff of B will be either $800 (probability 0.2) or $100 (probability 0.8). The appropriate discount rate for project B is 20%. In this simple economy, there are 90% chance that the project will be A. Evaluate the funding situation, i.e., which type of project will be funded and the price, based on the following scenarios: If a bank can tell whether the entrepreneur is endowed with project A or B, but cannot stop A from switching to B after A has receive the fund. What is the maximum face value of loan that the bank can lend to A without incur any monitoring costs, i.e., A will not have incentive to switch to B given this incentive compatible amount of loan and limited liability.A project has a forecasted cash flow of $121 in year 1 and $132 in year 2. The interest rate is 8%, the estimated risk premium on the market is 10.25%, and the project has a beta of 0.61. If you use a constant risk-adjusted discount rate, answer the following:a. What is the PV of the project? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. What is the certainty-equivalent cash flow in year 1 and year 2? (Do not round intermediate calculations. Round your answers to 2 decimal places.) c. What is the ratio of the certainty-equivalent cash flows to the expected cash flows in years 1 and 2? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
- Given the following variables: S = $50, E = $45, T = 1 year, r = 2 %, and P = $5; if the call option is selling for $11 (C = $11), what arbitrage opportunity exists? Outline the strategy and the profit to be realized.Currently under consideration is a project with a beta, b of 1.50. At this time, the risk free rate of return, Rf is 7%, and the return on the market portfolio of assets, Rm is 10%. The project is actually expected to earn an annual rate of return 11%. a. Calculate the required rate of return using the capital asset pricing model (CAPM). b. Assume that the market return drops by 1%, what would be the required rate of return?A project has a forecasted cash flow of $121 in year 1 and $132 in year 2. The interest rate is 8%, the estimated risk premium on the market is 10.25%, and the project has a beta of 0.61. If you use a constant risk-adjusted discount rate, answer the following: What is the PV of the project? What is the certainty-equivalent cash flow in year 1 and year 2? What is the ratio of the certainty-equivalent cash flows to the expected cash?
- Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 11 percent, and that the maximum allowable payback and discounted payback statistic for the project are 2 and 3 years, respectively. Time 0 1 2 3 4 5 6 Cash Flow -1,040 140 460 660 660 260 660 Use the NPV decision rule to evaluate this project; should it be accepted or rejected?Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 12 percent, and that the maximum allowable payback and discounted payback statistic for the project are 2 and 3 years, respectively. Time 0 1 2 3 4 5 6 Cash Flow -1,150 30 570 770 770 370 770 Use the NPV decision rule to evaluate this project; should it be accepted or rejected? Multiple Choice A. $968.66, accept B. $2,118.66, accept C. $-495.13, reject D. $864.87, acceptWhat will be the discounting rate for a project with a 4% risk-free rate and 8% market risk premium when beta for this project is estimated at 1.67?
- Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 10 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and a half and three and a half years, respectively. Time 0 1 2 3 Project A Cash Flow −1,000 300 400 700 Project B Cash Flow −500 200 400 300 Use the IRR decision rule to evaluate these projects; which one(s) should be accepted or rejected? Multiple Choice Accept A, reject B Accept both A and B Accept neither A nor B Reject A, accept BYou are offered an investment opportunity in which you will receive $25,000 in one year in exchange for paying $23,750 today. Suppose the risk-free interest rate is 6% per year. Should you take this project? The NPV for this project is closest to: A) Yes; NPV = $165 B) No; NPV = $165 C) Yes; NPV = -$165 D) No; NPV = -$165Suppose that there are two alternatives as project I with initial cost of 50.000 TL. and project II with initial cost of 75.000 TL. You have MARR of 10%. If the incremental rate of return delta i* ( II - I )=4% then which project should you select?