Problem $1\mathrm{.}4$

A subsidiary of a larger company $($parent company$)$ is considering an investment with

an economic life of $4$ years.

The finance department in the parent company has just sent an email to the subsidiary

stating the expected real free cash flow $($FCF$)$ for the investment, see table $1\mathrm{.}4$:

Table $1\mathrm{.}4$: Real FCF relating to the investment of the subsidiary

In table $1\mathrm{.}4,$ the real amounts are calculated at the price level of $t=0.$

The above cash flow does not include any scrap value at $t=4.$

The finance department of the parent company also states that they estimate that the

systematic risk for the investment is given by a beta value of $2.$

Annual inflation over the life of the investment is expected to be a constant $3\mathrm{.}1\%.$ The

nominal risk$-$free interest rate is expected to be a constant $3\mathrm{.}3\%$ throughout the period

calculated on an annual basis.

It is also expected that the annual real return of the market portfolio for the entire

period will be constant $5\mathrm{.}5\%.$

It can be assumed that the conditions for the CAPM are met.

Problem $1\mathrm{.}4.$a$)$

Given a Beta$-$value of $2$: Calculate the expected nominal return on the investment cal$-$

culated on an annual basis.

Problem $1\mathrm{.}4.$b$)$

Calculate the internal rate of return $($IRR$)$ on the amounts in table $1\mathrm{.}4.?$