Problem 12-32 CAPM and Cost of Capital (LO3)

You are a consultant to a firm evaluating an expansion of its current business. The cash-flow forecasts (in millions of dollars) for the project are as follows:

Years	Cash Flow
0		100
1 - 10	+	18

On the basis of the behavior of the firms stock, you believe that the beta of the firm is 1.38. Assume that the rate of return available on risk-free investments is 7% and that the expected rate of return on the market portfolio is 15%.

a. What is the project IRR? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

IRR

%

b. What is the cost of capital for the project? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Cost of capital

%

c. Does the accept-reject decision using IRR agree with the decision using NPV?

multiple choice

• Yes

• No