question archive Brookfield uses a risk-adjusted rate of return of 13 percent to evaluate the net present value of this type of investment
Brookfield uses a risk-adjusted rate of return of 13 percent to evaluate the net present value of this type of investment
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Brookfield uses a risk-adjusted rate of return of 13 percent to evaluate the net present value of this type of investment. You may assume that the rate of return for reinvesting any cash inflow from the investment will also be 13 percent. (a) Do a year-end financial analysis for the five years to determine the after-tax net present value, and internal rate of return. (b) Present the NPV profile for this project. (c) Should Brookfield Properties accept this project?
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1) If the risk of the project is lower than the average risk of the company, the discount rate should be lower as well.
2) Plot Point A where beta = 1 and returns = 13%
Plot Point B where beta = 0.8 and returns = 12.2% = 9% + 0.8 x (13% - 9%) - CAPM equation
3) NPV = PV of cash inflows - Initial Investment
PV of cash inflows can be calculated using PV function on a calculator
Insert N = 5, PMT = -24, FV = 0, I/Y = 13% => PV = 84.41 million
NPV = 84.41 - 8 = 76.41 milion
4) If beta = 0.8, then I/Y = 12.2% (as shown above)
=> PV = 86.09 million and NPV = $78.09 million
