M-tel is financed entirely with equity, and the firm's stock has a beta of 0.85. M-tel is considering investing in a project that is expected to have a beta of 1.3. The project requires an initial outlay of $6 million and is expected to generate after-tax net cash flows of $1.3 million each year for 8 years. Calculate the NPV of the project. Assume the risk-free rate is 7% and the expected market return is 14%. (Note: Problem requires either calculator use or interpolation from the tables. The suggested solutions use calculator accuracy.)

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Quizplus · Accepted Answer

The project's beta is 1.3, which is higher than the firm's stock beta of 0.85, indicating higher risk. The required return using CAPM is 16.1% (7% + 1.3*(14%-7%)). Using this discount rate, the NPV is calculated as -$371,484.

M-Tel Is Financed Entirely with Equity, and the Firm's Stock