Question 5: Total Cash Flow of a Project [10 points]

You have to analyze a proposal for launching a new production line. You observe cash flow estimates for year 1. The needed capital investment is NOK1.746 billion. Revenues are estimated to be NOK3.182 billion and expenses NOK1 billion. Depreciation amounts to 50% of capital investment. Corporate tax is 21%. Working capital increased by NOK8.5 million. Calculate the total cash flow in year 1.

Question 6: Portfolio Theory [10 points]

Stock A has expected return of 26% and volatility 50%. Stock B has expected return of 7% and volatility 30%. The two stocks are perfectly negatively correlated (i.e., correlation coefficient of -1). a. Calculate the portfolio weights that remove all risk (i.e., the resulting portfolio must have a volatility of zero). b. If there are no arbitrage opportunities, what is the risk-free rate of interest in this economy? (If you did not manage to provide a numerical answer in point a, explain briefly in words)