You consider an investment project which has an investment outlay of 100000 and generates a risky cash flow of 28000 each year for 5 years/ You estimate that the beta of the project is 1.2. The risk free rate of return is 5% and the expected rate of return on the market index is 10%. Should the project be undertaken if you use a payback method of 4 years? Should it be undertaken if you use an NPV method?
I understand the pay back method part. But i got problem with finding the cost of capital in order to get NPV.
Assume that CAPM formla: E(R)=rf + b(1+rf)
I don't see the relationship to get cost of capital.
Anyone Help help help.
There is an error with your formula.
E(R) = rf + b (rm - rf)
5 years = 3,485
Originally posted by deepak.c:
There is an error with your formula.
E(R) = rf + b (rm - rf)
5 years = 3,485
oh k.. then how do i find the cost of capital to discount my Cash flows??
E(R) = risk free rate + beta x (market rate - risk free rate)
http://www.moneychimp.com/articles/valuation/capm.htm
It's a very straight forward question.