Jupiter Inc.’s directors are considering expanding their operations in foreign markets. They estimate that the cost of expansion is approximately $42 million. The company’s CFO has estimated that new foreign operations will generate the following cash flows: Year 1 = $2,120,000 Year 2 = $2,838,000 Year 3 = $3,480,000 Year 4 = $4,570,000 Year 5 onward, the cash flow stream is going to stabilize at $5,500,000 which is going to continue forever. Given that the company’s required rate of return is 11%, what is the NPV of the project?
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Jupiter Inc.’s directors are considering expanding their operations in foreign markets. They
estimate that the cost of expansion is approximately $42 million. The company’s CFO has estimated that
new foreign operations will generate the following cash flows:
Year 1 = $2,120,000
Year 2 = $2,838,000
Year 3 = $3,480,000
Year 4 = $4,570,000
Year 5 onward, the cash flow stream is going to stabilize at $5,500,000 which is going to continue
forever. Given that the company’s required rate of return is 11%, what is the
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