Can any one Solve and Explain me this ?

[supersunny138]

Please i would really be thankfull to u .. to find out how u came to ur calculations thankyou

Consider a project that costs $100,000. The project may succeed with probability
0.5 or may fail with probability 0.5. If the project succeeds, it yields a cash-flow of
$120,000. If it fails, it yields a cash-flow of $90,000. The project has a beta of 1.2.
The risk-free rate is 4% and the expected return on the market is 10%.
a) What are the project�s expected, realized, and required returns?
b) How much would an investor be willing to pay for the cash-flow stream, given
the project�s beta?
c) What is the project�s NPV?

 

[JoeyDVivre]

Isn't there some timeframe given in the question somewhere?

 

[supersunny138]

no i am really sorry it was given to me like this ...

 

[quorky]

Arent B and C the same thing?

An investor would not pay more than NPV, so NPV is the answer for both, unless I forget some little spin that they put on this...

Let me attempt to answer:

Expected return: 4.49%
Realized: I dont really know what this is asking
Required: Well Market required, based on Beta is 11.2%

B & C

NPV = 4,496

 

[cpk123]

quorky

I believe Joey's question about the time frame of the investment is required to answer the NPV question.

At the project's Beta
Expected return for investor = 4 + 1.2 (10-4) = 11.2%

With a 1 year time horizon for the investment:

NPV = -100000 + 105000/(1.112) = -5575

105000 = 120000*.5 + 90000 *.5

Not sure where you got the NPV of 4496 from.

CP

 

[quorky]

Sorry, I assumed the time at 1 year (I thought I stated that assumption, but I guess I forgot)...

Also I agree with your answer, I was doing it quickly and just subtracted the initial investment from the expected value.

So, my answer was wrong... I agree with CPK... Now that I look at it, the question starts to make even less sense...

I feel embarrassed (and I am a Level 3 Candidate ;o)...)

 

[JoeyDVivre]

I think this is a messed up question.

 

[supersunny138]

This is what they do to us at school !! teach us less and expect us to do much more then that .. which is not our level i am a BBA student in last year specializing in finacne !! Well iam new here .. thanks everyone fo being so coperative i intend to sit for CFA next here !! Sunny (BI norwegian school of management) Norway ..