Ferrari is considering undertaking a new investment project in a new car. The cost of the initial investment is $5 million in year zero. The project then yields the following expected cash flows (in millions): 1 Year 1: $3 Year 2: $0 Year 3: $1 Year 4: $2 a. Suppose that the risk-free rate is equal to 2%, and that the expected return on the market portfolio is equal to 8%. If this projects beta is equal to 1.5, what is the required rate of return (a.k.a. cost of equity)? b. Should the firm undertake the project? Answer yes or no and show why. c. Suppose that a close competitor, Volvo, is evaluating a similar project. Volvo's project has identical cost and cash flows in years 1, 3 and 4, but

has an additional non-zero cash flow in year 2. If Fiats project has an

If the internal rate of return is 20%, what is its cash flow in year two equal to?