You are considering undertaking a project that has beta of 1.2, an initial cost of $100 million and annual after-tax inflows of $10 million for 20 years starting at the beginning of next year. The risk-free rate is 2% and the market is expected to yield 5% over the next year.

1. a) Assuming that the CAPM holds, what is the appropriate discount rate for this project?

2. b) What is the NPV of the project?

3. c) What is the IRR of the project?

4. d) What is the alpha of this project? Does a positive alpha correspond to a positive NPV? Why?

5. e) How high can the beta of the project be before the NPV turns negative?