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We are evaluating an investment project that will generate cash flows of $25,000, $40,000 and $30,000 in the next three years. The required initial investment is $70,000. Assume that the company is 100% equity finance (there is no debt in the capital structure of this company). The risk-free rate of interest of 4% and the expected market risk premium is 8%. However, we are unsure of the risk of the company. If we think the beta of the firm is 0.8, when in fact the beta is really 1.7 will we be making the correct investment decision? For how much more or less (in dollars) are we valuing the investment project?

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Financial Management, Finance

Category:- Financial Management
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